AUSL/CORPORATION LAW REVIEWER/AJP-SFO ARELLANO UNIVERSITY SCHOOL OF LAW BUSINESS ORGANIZATION II CORPORATION LAW REVIEWER ATTY. RUBEN LADIA By: PARRENO, ANTONY J. OLIVA, STEPHANIE FAYE DEFINITION OF A CORPORATION Section 2. Corporation defined. – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. awarded. (MERALCO vs. Team Electronics Corporation, 2007) 2. CORPORATION HAS THE POWERS AS MAY EXPRESSLY BE CONFERRED BY LAW. DOCTRINE OF LIMITED CAPACITY in the corporate form of business. Unlike a natural person, it can only do such acts and things as the law allows it to do. Thus, the definition that it has the powers, attributes and properties expressly authorized by law or incident to its existence. DIFFERENT TYPES OF CORPORATIONS Q: IS A CORPORATION ENTITLED TO THE AWARD OF MORAL DAMAGES? Section 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a) No. It is not entitled to moral damages. Moral damages may be awarded in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, and similar injury. (Tamayo vs. University of Negros, 1962) Section 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n) A corporation being an artificial person existing only in contemplation of the law has No Feelings. It has No Emotions and No Senses. It cannot thus experience mental anguish and physical suffering. Stock Corporations - one with capital stock divided into shares and are authorized to distribute allotment of its surplus profits by way of dividends. ATTRIBUTES 1. CORPORATION BEING AS AN ARTIFICIAL INSTANCES WHEN MORAL DAMAGES MAY BE AWARDED: REQUISITES IN ORDER THAT A CORPORATION MAY CONSIDERED AS A STOCK A corporation may have a good reputation which is besmirched may also be a ground for the award of moral damages. (Mambulao Lumber vs. PNB, 1968) 1. A capital stock divided into shares; Article 2219 enumerates the instances when moral damages may be awarded. Said provision authorizes the recovery of moral damages in cases of libel, slander and any other form of defamation. All others are Non-Stock. This provision of the Civil Code does not qualify whether the plaintiff is a natural or a juridical person. Thus, a juridical person can validly complain for libel and any other form of defamation and claim for moral damages. (Filipinas Broadcasting vs. Ago Medical Center, 2005, Art. 2219, (7), NCC) 2. The authority to distribute allotment of its surplus profits by way of dividends CORPORATIONS WITH CAPITAL STOCK BUT THEY ARE NOT STOCK CORPORATIONS. Club shares - they have capital stock divided into shares but they are Non-Stock in the sense that they do not distribute allotment of their surplus profits by way of dividends. Example: Manila Golf Club When the corporation has a reputation that is debased resulting in its humiliation in the business realm, moral damages may be AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |1 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. WHAT WOULD BE THE IMPORTANCE OF KNOWING THE TYPE OF CORPORATIONS INVOLVED? This cannot be done in case of a Stock Corporation due to the Doctrine of Limited Capacity It is important in order to determine what law or provision of the law may apply to them. In case of Stock and Non-Stock Corporations: Note however that if there is no by-law provision authorizing the holding of the members’ meetings in Non-Stock Corporation then of course the meeting can also be held only within the territorial boundaries of the city or municipality where it has its principal office. Section 87(2). The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title. The abovementioned provision provides that: “The provisions governing Stock corporations when pertinent shall be applicable to NonStock corporations except as may be provided by Title 11.” Therefore, Title 11 is the provision governing Non-Stock Corporations Venue of Meetings of Stockholders Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. Stockholders Meetings can only be held within the territorial boundaries of the city or municipality where the corporation has its principal office and as far as practicable, at the principal office of the corporation. Section 93. Place of meetings. – The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. A Non-Stock Corporation can validly provide in their by-laws that members’ meetings may be held anywhere in the Philippines. AUSL/CORPORATION Section 87, the provisions Corporations will apply; So if by-law provision, then the respect to a stock corporation non-stock. governing Stock there is no such same rule with will also apply to Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. Metro Manila is considered as one single City or Municipality. So whether they be non-stock or stock corporation, if the principal office is located anywhere in Metro Manila, they can hold their meetings also anywhere within Metro Manila. Section 24. Election of directors or trustees. – At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by LAW REVIEWER/AJP-SFO Page |2 AUSL/CORPORATION LAW REVIEWER/AJP-SFO the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. (31a) Section 24 speaks of Cummulative Voting. Cummulative Voting is a matter of Right in Stock Corporations and cannot be denied by the provisions of the Articles of Incorporation or By-Laws. Whereas, in Non-Stock Corporations unless provided for in the Articles of Incorporation or by-laws, members are entitled to cast only one vote per candidate. GR: in Non-stock corporations, cummulative voting is not allowed. XPN: (1) Sec. 24 also states, “Unless otherwise provided for in the Articles of Incorporation”. (2) Under the provisions of Title 11, the Articles of Incorporation or by-laws of a non-stock corporation under Sec. 89, may broaden, limit or deny voting rights of the members. Meaning, it can validly allow also cummulative voting. CORPORATIONS CREATED BY SPECIAL LAW Section 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (n) Q. WHAT LAW GOVERNS THEM? They are governed by the Special Law creating them; supplemented by the provisions of the Corporation Code when pertinent. Thus, where there is a provision in the special law creating them, the special law will govern even if it may run counter to the provisions of the Corporation Code. In Gonzales vs. PNB, a stockholder sought to inspect the financial books and records of the Philippine National Bank. The Supreme Court held that a particular stockholder cannot inspect the financial books and records because the PNB was created by special law. The special law creating PNB provides that, “the financial books and records of the PNB may be inspected only by the Monetary Board of the Central Bank and the result of the inspection can only be revealed to the President of the Republic of the Philippines, the Secretary of Finance and of the members of the Board of PNB itself.’” LAWS GOVERNING EMPLOYER-EMPLOYEE RELATIONSHIP: (1) National Labor Code (2) Civil Service Law Q. WHAT LAW GOVERNS EMPLOYEREMPLOYEE RELATIONSHIP IN GOCC’s OR THOSE WITH THEIR OWN CHARTER? The test in determining whether a GovernmentOwned or Controlled Corporation is subject to the Civil Service Law is the manner of its creation (PNOC-EDC vs NLRC). If it is created by special law or it has its own charter, then the Civil Service Law will apply. When it is incorporated under the General Corporation Law, it is the Labor Laws. PNOC was created by special law, so therefore, generally it is governed by the Civil Service Law. But PNOC-EDC, which is a subsidiary of PNOC, was created by merely following the requirements and procedures laid down by the Corporation Code. There was an issue regarding employeremployee relationship in PNOC-EDC, not the PNOC itself. Therefore, since it was created by the Corporation Code pursuant to the Corporation Code, the employer-employee relationship issue will be governed by the Labor Laws. AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |3 AUSL/CORPORATION LAW REVIEWER/AJP-SFO COMMENCEMENT EXISTENCE OF CORPORATE 4. The term for which the corporation is to exist; Section 19. Commencement of corporate existence. – A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (n) 5. The names, nationalities and residences of the incorporators; GR: Corporation commences to exist upon the issuance of the Certificate of Incorporation or Registration by the SEC. XPN: (1) Corporation sole commences to exist and will be vested with a juridical personality upon the filing of the verified Articles of Incorporation with the SEC. (2) Those created by special law. They are not issued approval or certificates of incorporation by the SEC but they are created by law. It will commence to exist upon the effectivity of the law creating them. CONTENTS AND FORMAT ARTICLES OF INCORPORATION OF THE Section 14. Contents of the articles of incorporation. – All corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: 1. The name of the corporation; 2. The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, That a non-stock corporation may not include a purpose which would change or contradict its nature as such; 3. The place where the principal office of the corporation is to be located, which must be within the Philippines; 6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); 7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; 8. If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; 9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five (25%) percent of the authorized capital stock of the corporation has been subscribed, and at least twenty-five (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up capital being not less than five thousand (P5,000.00) pesos. Section 15. Forms of Articles of Incorporation. – Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF (Name of Corporation) KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines; AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |4 AUSL/CORPORATION LAW REVIEWER/AJP-SFO AND WE HEREBY CERTIFY: FIRST: That the name of said corporation shall be "_______, INC. or CORPORATION"; SECOND: That the purpose or purposes for which such corporation is incorporated are: (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of _________, Province of ________, Philippines; FOURTH: That the term for which said corporation is to exist is _____________ years from and after the date of issuance of the certificate of incorporation; FIFTH: That the names, nationalities and residences of the incorporators of the corporation are as follows: NAME ____________ NATIONALITY RESIDENCE _____________ _____________ SIXTH: That the number trustees of the corporation and the names, nationalities the first directors or trustees are as follows: NAME ____________ of directors or shall be _______; and residences of of the corporation NATIONALITY RESIDENCE _____________ _____________ SEVENTH: That the authorized capital stock of the corporation is ________ (P_____) PESOS in lawful money of the Philippines, divided into _______ shares with the par value of _______ (P_____) Pesos per share. (In case all the share are without par value): That the capital stock of the corporation is _______ shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of ______ shares of which _______ shares are of the par value of _______ (P_______) PESOS each, and of which _____ shares are without par value. EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above stated has been subscribed as follows: Name of Subscriber Nationality No. of Shares Subscribed Amount Subscribed _________ _________ __________ __________ NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of the total subscription as follows: Name of Subscriber Amount Subscribed Total Paid-In ____________ _____________ _____________ (Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That _______ has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscription (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following): "No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this ___day of __, 19 ______ in the City/Municipality of ___________, Province of _______, Republic of the Philippines. __________ _________ (Names and signatures of the incorporators) SIGNED IN THE PRESENCE OF: ___________ __________ (Notarial Acknowledgment) TREASURER’S AFFIDAVIT REPUBLIC OF THE PHILIPPINES) CITY/MUNICIPALITY OF ) S.S. PROVINCE OF ) I, _________, being duly sworn, depose and say: That I have been elected by the subscribers of the corporation as Treasurer thereof, to act as such until my successor has been duly elected and qualified in accordance with the by-laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in the amount of not less than P5,000.00, in accordance with the Corporation Code. ____________________ (Signature of Treasurer) AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |5 AUSL/CORPORATION LAW REVIEWER/AJP-SFO SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality of____Province of _______, this _______ day of ___________, 19 _____; by ________ with Res. Cert. No. ___________ issued at _________on ______, 19 ____ NOTARY PUBLIC My commission expires on _________, 19 _____ Doc. No. _________; Page No. _________; Book No. ________; Series of 19____ (7a) GR: A corporation, once formed with its chosen name cannot use any other name. XPN: (1) Unless it has been amended in accordance with the law. (2) As this would result in Confusion and may open the door for Fraud and Evasion as well as Difficulties in administration and supervision. In Philips Export v. CA (1992), two requisites must concur: Prefatory Paragraph - where the incorporators will say that it is being created in accordance with the Philippine Laws ARTICLE 1. CORPORATE NAME Section 18. Corporate name. – No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (n) No corporate name shall be allowed by the SEC if the proposed name is: (1) Identical, Deceptively or Confusingly similar to any existing corporation or any other name already protected by law; or (2) Patently deceptive, confusing, or contrary to law. The name of the corporation designates the corporation in the same manner that the name of an individual designates the person. This is so because the corporate name is the “Principal Means” of distinguishing it not only from the stockholders or members composing it but also from other firms or entities. Under Sec. 14 and 15, the corporate name must include the word “Corporation” or “Incorporated” either in its full or abbreviated form, to distinguish it from any other type of business entity. Only corporations can append the word “Corporation” or ”Incorporated” in its chosen name. It cannot be done in a partnership or sole proprietorship. 1. That the complainant corporation acquired a Prior Right over the use of the corporate name; and 2. The proposed name is either: a. Identical, Deceptively or Confusingly Similar to any other existing corporation or anyone already protected by law; or b. Patently Deceptive, Confusing Contrary to Law. or Probability of Confusion Proof of Actual Confusion need not be shown. It suffices that the confusion is probably or likely to occur. In Lyceum of the Phil. V. CA, the Court held that the policy underlying the prohibition against the registration of corporate name which is identical, deceptively or confusingly similar to that of any other corporation or is patently deceptive or plainly confusing or contrary to law is: The avoidance of confusion or fraud. In this case, confusion has been effectively precluded by including the geographical location of the particular institutions of learning. Example: How could one be confused from Lyceum of Baguio from Lyceum of Apari? They are far away situated from one another. DOCTRINE OF SECONDARY MEANING A word or phrase originally incapable of exclusive appropriation because they are generic words with reference to an article in the market because of geographically, otherwise descriptive, might nevertheless have been used so long or so exclusively by one good user or service provider that is with reference to the article or service that in that trade or in that branch of the purchasing public, the word or phrase has become to mean that the article or service is his own. AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |6 AUSL/CORPORATION LAW REVIEWER/AJP-SFO ARTICLE 2. PURPOSE CLAUSE. the Also true in a Non-Stock Corporation, unless the Articles of Incorporation or By-Laws provide otherwise. The importance of the purpose clause is that it practically defines the scope of the corporate enterprise. The articles and by-laws of a NON-STOCK corporation can validly provide that members’ meetings can be held ANYWHERE in the Philippines. The purpose or purposes for which corporation is formed are as follows: This is corollary to the Doctrine of Limited Capacity in the corporate form because it confers as well as it limits the actual authority of the corporation. Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) (3) Service of Summons Service of summons to a corporation may be served only also within the city or municipality where it has its principal office. (4) Registration of Chattel Mortgage Under the Mortgage Law, if the shares of stocks of a corporation are mortgaged, it must be registered in the Registry of Deeds of the city or municipality where it has its Principal Office. Section 45 provides that it can only do such acts and things as are expressly granted by law, the articles of incorporation and those that are necessary or incidental thereto. And if the owner of the shares resides in another city or municipality, it must also be registered in the city or municipality where he resides. If it acts or transacts business beyond such powers and authority, the act performed. It will be considered as Ultra Vires. If these requirements of the Mortgage Law are not complied with, then the mortgage will not be valid as against third parties. Allowing a collateral attack on the part of the contracting parties to question the validity of the questioned act or transaction and escape liability therefrom. ARTICLE 4. CORPORATE TERM ARTICLE 3. PRINCIPAL OFFICE “That the principal office of a corporation shall be located at Q.C, Metro Manila, Philippines” This statement establishes the residence of the corporation which may serve important for the purpose of determining among others: (1) Venue of Actions for or against the corporation. Section 11. Corporate term. – A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (6) If an action is not based from a written contract, the corporation can only be sued in the city or municipality where it has its principal office. “The term for which the corporation shall exist shall be __no. of years from and after the date of its registration.” Of course, if it has a contract, then the contract may stipulate venue of actions that may arise out of any question involving the same. GR: A Corporation can exist for a period not exceeding fifty (50) years from the date of its incorporation. (2) XPN: Venue of Meetings and/or members. of stockholders In a Stock Corporation, meetings can only be held within the territorial boundaries of the city or municipality where it has its principal office. And as far as practicable at the principal office of the corporation. (1) Sooner Dissolved; or (2) The period is extended by way of amendment of the articles of incorporation. It may be extended for periods not exceeding fifty (50) years, for any single instance by amendment of the articles of incorporation. AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |7 AUSL/CORPORATION LAW REVIEWER/AJP-SFO GR: No Extension of the corporate term can be made earlier than five (5) years, prior to the expiration of the original term stated in the articles of incorporation. XPN: There are Justifiable Reasons for an earlier extension, as may be determined by the SEC. ARTICLE 5. INCORPORATORS Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Q. CAN MINORS BE INCORPORATORS, EVEN IF REPRESENTED BY THE GUARDIAN OR THEIR PARENTS? No. Because the law is categorical, and requires them to be All of Legal Ages. Sec. 10 does not require any Citizenship, thus no Citizenship requirement GR: A corporation organized under Philippine Laws may have Incorporators consisting solely of Foreigners. XPN: (1) If it is covered by our Nationalization Laws. Example: Under the Trade Liberalization Law of the Philippines Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) “The names, nationalities and residences of the incorporators” Corporations engaged in the retail trade may consist of stockholders solely of Foreigners if the paid-in capital is at least U.S $2.5Million or its peso equivalent. Stockholders or Members originally forming the Corporation and who are signatories of the articles of incorporation are the Incorporators Q: IN THIS CASE, ALL THE INCORPORATORS OR STOCKHOLDERS ARE FOREIGNERS. IS THIS ALLOWED? Section 10. Number and qualifications of incorporators. – Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a) Yes. Because the law only says “majority of whom are residents of the Philippines”. Qualifications and Disqualifications as to who may be Incorporators: (1) Any number of “NATURAL” persons, not less than 5 but not more than 15; (2) All of legal age; and (3) The majority of whom are residents of the Philippines GR: A Corporation cannot generally be an Incorporator Because the law says “natural” persons. A corporation is not a natural person. XPN: R.A 720, as amended by PD 122 Said law allows cooperatives and corporations, primarily organized to hold equities in Rural Banks. ARTICLE 6. DIRECTORS AND TRUSTEES Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of nonstock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. “The names, nationalities and residences of the Directors or Trustees who are to serve as such until their successors have been elected and qualified in accordance with law.” AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |8 AUSL/CORPORATION LAW REVIEWER/AJP-SFO (1) Not less than 5 but not more than 15 members of the governing board (2) Must own at least one (1) share of the Capital Stock whose share shall stand in his name in the books of the corporation (3) Majority of them must be residents of the Philippines. There may also be other Qualifications or Disqualifications that may be provided in the by-laws in accordance with Sec. 47(5). Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 5. The qualifications, duties and compensation of directors or trustees, officers and employees; Again, there is no Citizenship Requirement, Only Residency requirement. Thus, a corporation created under the laws of the Philippines may have members of the governing board consisting solely of Foreigners Unless barred by our nationalization laws. Q: SHOULD THE STOCKHOLDER BE THE BENEFICIAL OR EQUITABLE OWNER OF THE SHARE IN ORDER THAT HE MAY QUALIFY TO BE A DIRECTOR? EXAMPLE, THE PERSON HOLDS THE SHARE IN TRUST FOR A CERTAIN MINOR, IS HE QUALIFIED TO BE A DIRECTOR? Yes. It suffices that he is possessed with Legal Title to the shares (Lee vs. CA) What is material is the Legal Title to and not Beneficial Ownership of the stock, as appearing in the books of the corporation. As long as he holds at least one (1) share, as appearing in the books of the corporation, no matter how he is holding the same, whether in trust or otherwise, he becomes qualified to be a Director. DISQUALIFICATION OF DIRECTORS Section 27. Disqualification of directors, trustees or officers. – No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (n) Example: Sec. 4, Art. 14, 1987 Constitution One cannot be and serve as a director if: Subject to certain exceptions, the Management of Educational Institutions shall be vested solely to citizens of the Philippines. Educational institutions may have Stockholders consisting of Foreigners. They can co-own or hold a maximum of (40%) of the capital stock of an educational corporation. Q. BEING STOCKHOLDERS, QUALIFY TO BE DIRECTORS? CAN THEY (1) He has been convicted by Final Judgment, not merely a charge, of an offense punishable by imprisonment for a period exceeding (6) years or a violation of the Corporation Code, committed within (5) years prior to the date of his election (2) As provided for in Section. 23, if he ceases to own at least one (1) share of the capital stock. GR: No. There is a constitutional prohibition. Because a director is a Manager of the corporation. And since the management is vested solely to citizens of the Philippines, even if they may have shares of stock, these foreigners cannot qualify to be and to act as directors. (3) Others as may be provided for in the ByLaws XPN: Those created by Mission Boards, Charitable Institutions and Religious Orders. In the case of Gokungwei vs. SEC, Gokungwei has business interests directly in competition with the San Miguel Corporation. Example: St. Louis University, created by a religious sect based in Beligium. The president and the chairman of the board is a Belgian priest. As provided for in Section. 47, the by-laws may provide for additional qualifications and disqualifications for membership in the board. San Miguel amended the by-laws to provide for a Disqualification for membership of the board: Disqualifying a stockholder from being elected as a member of the board, if he happens to own a controlling interest in another business or enterprise directly in competition with San Miguel. AUSL/CORPORATION LAW REVIEWER/AJP-SFO Page |9 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The Supreme Court upheld the validity of the By-Laws, inserting said disqualification as being reasonable, as it prevents the uniting of incompatible interests in one single enterprise. OTHER ALLIED LAWS TO CONSIDER FOR PURPOSES OF DISQUALIFICATION: (1) At least 25% of the authorized capital stock must be Subscribed (2) At least 25% of the Total Subscription must be paid (1) Central Bank Banking Laws Meaning, the law does not require that each of the subscribers must pay at least 25% of their respective subscription. A person charged with an offense involving Financial Fraud cannot be a director in a financial institution. This is an exception from the law requiring conviction by final judgment, under Section 27. Thus, anyone or some of these stockholders or subscribers may pay the minimum paid-up capital of 25% of the Total Subscription, while the others may not have paid a single centavo out of their subscriptions. (2) Financial Company Act of the Philippines In no case however, that the paid-up capital be less than P5,000.00 You have to submit NBI and Police Clearance of Directors applying in a financing company. How can he be a director therefore if he is charged with an offense? ARTICLE 7. CAPITAL STOCK If it is a Stock Corporation, it is But again we have to note that while the law prescribes P5,000.00 as the minimum paid-up capital, there are certain business activities where the law or rules and regulations would require higher Paid-Up Capital than that provided for by the Corporation Code. Example: (1) The Authorized Capital Stock. (2) The number of shares within which it is divided (3) The par value of its shares (4) There may be no par value shares (5) The amount subscribed, (6) The names, residences and nationalities of the subscribers and their respective subscriptions (7) The paid-in or paid-up capital If it is a Non-Stock Corporation, it is sufficient to indicate: (1) The operating capital (2) The names, nationalities and residences of those who contributed to the capital ARTICLE 8. SUBSCRIBED CAPITAL STOCK (1) Financing Company Act of the Philippines P10M minimum paid-up capital, if the principal office is located in Metro Manila. P5M in other cities or municipalities (2) Banking There is a minimum paid-up capital prescribed by the Central Bank (3) POEA Those hiring for employees recruitment agencies, P3M abroad or ARTICLE 9. SUBSCRIBERS NB: Check the particular agency concerned as they might have prescribed a minimum paid-up capital. ARTICLE 10. TREASURER Q. WHAT IS CAPITAL? ARTICLE 11. NO TRANSFER CLAUSE In the case of Gamboa v. Teves, 2011, this case involves the PLDT Co. and the issue of whether or not PLDT has violated our nationalization laws that is, the maximum number of ownership of shares of foreigners in the telecommunications industry. Section 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. – At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. (n) The Philippine Constitution reserves these types of corporations to Philippine nationals or partnerships or corporations of which 60% of the capital stock is owned by Filipino citizens. In this case, the 60-40 requirement was breached. Foreigners were holding more than 40% of PLDT’s capital stock. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 10 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The Supreme Court held that the term Capital in Sec. 11, Art. 12, 1987 Constitution refers only to shares of stocks Entitled to Vote in the Election of Directors. Considering that common shares with voting rights translates to control as opposed to preferred shares which are non-voting, the term Capital under the Constitution refers only to Common Shares. However, if the preferred shares have the Right to Vote in the election of directors then the term Capital shall include the preferred shares. Because the right to participate in the control and management of the corporation is exercised through the right to hold in the election of directors. In short, the term Capital in the Constitution refers only to shares of stocks that can vote in the Election of Directors. In that case, Justice Velasco dissented, saying that the Corporation Code defines Outstanding Stocks as the total shares of stock issued. It does NOT distinguish whether they are common or preferred shares. It includes all types of shares. Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) Likewise, the SEC defined Capital as to include both voting and non-voting shares in the determination of the Nationality of a corporation. It was defined by the SEC that Capital denotes the Sum Total of the shares subscribed and paid-in or promised to be paid by the stockholders irrespective of the nomenclature issued by the corporation. Hence, non-voting preferred shares are considered in the computation of the 60-40 requirement under the Constitution. A Motion for Reconsideration was filed because of this dissenting opinion, however the Motion for Reconsideration was denied. In Heirs of Gamboa vs. Teves, 2012, it was explained that the Constitutional provision reserving to Philippine nationals the operation of Public Utilities, like the PLDT, or to corporations with at least 60% of the capital stock, outstanding, refers only to shares with Voting Rights. In effect, the Supreme Court reiterated its earlier ruling. Three (3) Special Laws were cited: (1) Omnibus Investments Code of 1981 (2) Omnibus Investments Code of 1987 (3) Foreign Investments Act All these three special laws carried the definition of Philippine Nationals as stated under the Constitution. A Philippine National is: (1) A citizen of the Philippines; or (2) A domestic partnership or corporation organized under the laws of the Philippines with at least 60% of the capital stock, outstanding and entitled to vote is held by the citizens of the Philippines. The Supreme Court then held that only shares with voting rights should be the basis of determining whether or not the constitutional provision has been breached. Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock. Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 11 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights. (5a) Section 6 empowers a Stock Corporation to provide for a Classification of Shares which may grant the holder thereof certain rights and privileges not otherwise accorded to holders of any other types of shares. DOCTRINE OF EQUALITY OF SHARES Said rights and privileges of course must be clearly provided for in the articles of incorporation or the certificate of stock. Otherwise, all shares of stocks, irrespective of their classification, shall have the same rights and privileges. Q. WHY SHOULD A CLASSIFY ITS SHARES? CORPORATION (1) To Specify and Define the rights and privileges of the stockholders. Example: Voting and Non-Voting shares Non-Voting shares cannot vote for the directors and officers NB: Only Preferred and Redeemable shares may be denied the right to vote. (2) For Regulation and Control of the issuance of shares of stocks or sales of corporate securities for the protection of the purchasers or stockholders. Example: Close Corporations It is required that all of its shares for any class shall be subjected to one or more specified restrictions allowed by the Code. Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 12 AUSL/CORPORATION LAW REVIEWER/AJP-SFO As provided for in Section 96, the shares of stocks of a Close Corporation can be held of record only by not more than twenty specified persons. So if you are not one of those 20 specified persons, you cannot be a stockholder in that particular close corporation because Close Corporations are normally organized by closelyknit groups like the family, for instance. They would normally want to keep the business between and among themselves and they would not welcome strangers to come in and interfere in their management thereof. (3) As a Management Control Device (5) To Better Ensure return of investments Example: Preferred and Redeemable Shares Preferred Shares may be granted the right to receive dividends first before any other types of shares may receive their shares of the dividends. Redeemable Shares may be Optional or Obligatory. It may require the corporation to redeem that type of shares in the specified Return of Investment or Interest. Example: There is therefore insurance that you will have a better return of investment. In Voting and Non-Voting shares COMMON SHARES Only Voting Shares are entitled to vote in the election of directors who will manage the corporate affairs. The most common type of share is the Common Share. It usually carries with it Right to Vote and frequently the Exclusive Right To Vote. Founder’s Shares It must be observed, however, if there are more than one type of shares, each share, irrespective of classification, shall be equal in all respects. Unless the Articles of Incorporation or the Contract of Subscription provides otherwise. May be granted Specified Rights, including the Exclusive Right To Vote in the election of corporate directors and officers for a period not exceeding five years upon the effectivity of the Articles of Incorporation. Example: So for five years, the holders of these Founder’s Shares will have the exclusive right to vote and be voted upon as members of the Board and even as corporate officers. (4) For purposes of Compliance with Statutory Requirements, particularly with respect to Nationalized or Partly nationalized industries. Example: Utilization of the Philippine Natural Resources Minimum Ownership of Filipino is (60%). So Foreigners can own (40%). For purposes of compliance with that requirement of the law, if there are 100M shares, the corporation can classify it to the effect that there shall be 60M Common A Shares to be owned or held of record by Filipino citizens and 40M Common B shares which may be owned or held by any other citizen, other than Filipino Citizens. You cannot therefore transfer the 60M shares reserved solely for Filipinos to a foreigner because of the No Transfer Clause in the Articles of Incorporation “No transfer of shares of stocks which will result to a violation of our nationalization laws shall be recorded in the books of the corporation.” Preferred Shares may be issued. Are these shares Non-Voting? Not Necessarily. It wasn’t stated that they are Non-Voting preferred type of share. Non-Voting Shares are not included in determining compliance with the voting requirement to pass a valid corporate act. However, they are not absolutely denied the right to vote. Under the last paragraph of Sec. 6: “Except as otherwise provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided for in the Code shall be deemed to refer only to stocks with voting rights.” Q FOR INSTANCE, FOR THE APPROVAL OF MANAGEMENT CONTRACT, THERE ARE NON-VOTING SHARES. IN THE 100M SHARES, 20% ARE PREFERRED NONVOTING SHARES. WILL YOU INCLUDE THESE 20M SHARES IN ARRIVING AT THE VOTING REQUIREMENT IMPOSED BY THE CODE TO HAVE A VALID MANAGEMENT CONTRACT? No. They are not one of those listed under the immediately preceding paragraph of the last paragraph of Sec. 6. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 13 AUSL/CORPORATION LAW REVIEWER/AJP-SFO But if they fall under those enumerated in the Penultimate Paragraph of Section 6, then, you include Non-Voting Shares. That enumeration provides the instances when non-voting shares are nonetheless entitled to vote. TREASURY SHARES Treasury Shares are shares of stock which: (1) Has been issued as Fully Paid If that is the case, you include the non-voting shares in arriving at the voting requirement imposed by the Code. (2) Subsequently Reacquired by the issuing corporation either by Purchase, Redemption, Donation or any Other Lawful Mode of Acquisition. Management contract is not one of them, so Non-Voting Shares need NOT be included or counted. They have no voting rights while they remain in the treasury, because Treasury Shares are not Outstanding Stocks. INSTANCES WHEN NON-VOTING SHARES ARE ENTITLED TO VOTE: Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. (n) 1. Amendment of the Articles Of Incorporation 2. Adoption or Amendment of the By-Laws 3. Increase or Indebtedness Decrease of Bonded 4. Increase or Decrease in Capital Stock 5. Sale or Disposition of All or Substantially All Of The Corporate Assets and/or Properties 6. Mergers and Consolidations 7. Investment Corporation Of Funds in Another 8. Dissolution Of The Corporation If it falls under any of this enumeration, NonVoting Shares must also be counted in arriving at the voting requirement imposed by the Code to pass a valid corporate act or transaction. Under Section 6, Preferred and “Redeemable” Shares may be denied the right to vote. Unless otherwise provided for in this Code. In Gamboa v. Teves, the Supreme Court held that Common Shares cannot be deprived of the right to vote in any corporate meetings. Any provision in the Articles of Incorporation restricting the right of common shareholders to vote is invalid. You cannot deny Common Shares the right to vote. Q. MAY COMMON SHAREHOLDERS BE VALIDLY DENIED THE RIGHT TO VOTE, EFFECTIVELY THAT IS? Yes, they can be effectively denied the right to vote by the issuance of Founder’s Shares. NB: “Unless otherwise provided for in the Code” Founders’ Shares may be granted the right to vote in the election of directors and officers, for a maximum period of five years. When the law speaks of Voting and Dividend Rights, it speaks only of Outstanding Stocks. So, the Treasury Shares have no right to vote and to receive dividends, while they remain in the treasury of the corporation. Treasury shares may be subsequently reissued by the corporation. It becomes the Property Right of the corporation and they can thus sell or dispose of them again. When Re-Issued, they would REGAIN BACK— their status as Outstanding Stocks. They are Treasury Shares only while they are in the treasury of the corporation. NO PAR VALUE SHARES Section 6 provides for the limitations in the issuance of no par value shares: 1. Once they are issued they are deemed Fully Paid and Non-Assessable 2. The consideration for its issuance should not be less than P5.00/share 3. The entire consideration constitutes Capital, which is not available for dividend declaration Because dividends may be declared only out of the Unrestricted Earnings or Surplus Profits of the corporation 4. They cannot also be at the same time issued as Preferred Shares 5. They cannot be issued by banks, trust companies, public utilities and building and loans associations AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 14 AUSL/CORPORATION LAW REVIEWER/AJP-SFO RESTRICTIONS AND SHARES OF STOCKS TRANSFERS OF The Code does not require corporations registered under this provision to provide a statement of restrictions and transfers of shares. However, there is also likewise nothing in the law which should prohibit the corporation from providing reasonable restrictions, such as, Options and the Right of First Refusal in the articles of incorporation. If that be the case, it must be provided for in the Articles of Incorporation and in all of the Stock Certificates to be issued by the Corporation in order to be validly binding against 3rd persons. This is only directory. They may or may not provide restrictions or transfers of shares. Q. WILL THIS CORPORATIONS? APPLY TO CLOSE No. It is not only permissive, but mandatory. Section 96 provides that a Close Corporation must provide, among others, in the Articles of Incorporation that all of its shares of stocks of any class, shall be subjected to one or more specified restrictions and transfers of shares allowed by the Code. NO TRANSFER CLAUSE Guarantees full compliance nationalization laws. with our It bars the corporation from registering transfers of shares of stock if it is violative of the Nationality Requirements imposed by the Code. TREASURER IN TRUST, EXECUTION CLAUSE AND ACKNOWLEDGMENT Section 22. Effects on non-use of corporate charter and continuous inoperation of a corporation. – If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission. After it is incorporated, Section 22 requires: (1) Every corporation registered under this general provision that it must organize and commence the transaction of its business within two (2) years, from the date of its incorporation Its FAILURE to do so would result to the Automatic Dissolution of the corporation (2) If it commence the transaction of its business but subsequently becomes inoperative continuously for at least five (5) years: It will be a ground for the suspension or revocation of the corporate franchise. Thus, proper notice and hearing must be had. (3) If its failure to Organize or Commence the transaction of its business or to continuously operate is due to causes beyond the control of the corporation, as may be determined by the SEC, Automatic Dissolution, or suspension or revocation will not ensue. DE FACTO CORPORATION CORPORATION BY ESTOPPEL and Section 20. De facto corporations. – The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (n) Section 20 is the governing law regarding De Facto Corporations. This provision does not define what De Facto Corporations are but it merely states that: The due incorporation of any corporation claiming in good faith to be a corporation under the Code and its right to exercise corporation powers shall not be inquired collaterally in any private suit to which such corporation may be a party. Said inquiry may be made by the Solicitor General in a Quo Warranto Proceeding A De Facto Corporation however, is one that is so defectively formed or created, so as not to be considered as a De Jure Corporation, one that is formed or organized in strict compliance with the requirements of the law, it nevertheless exist for all practical intents and purposes as a corporate body by virtue of its bona fide attempt to incorporate under existing statutory AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 15 AUSL/CORPORATION LAW REVIEWER/AJP-SFO authority coupled with the exercise of corporate powers in good faith. While it may not be a De Jure Corporation by virtue of an irregularity in its organization, constitution or even from some ommission to comply with the requirements under which it may have been formed or organized as a De Jure Corporation, it nevertheless exist as a corporate body, separate and distinct from its stockholders/members composing it. In Hall v. Piccio, between and among the stockholders of a De Facto Corporation, it cannot exist as such De Facto Corporation, if the certificate of registration or incorporation has not yet been issued. Because between and among themselves, the supposed stockholders, they are aware of the fact of its non-registration REQUISITES FOR ITS EXISTENCE AS A DE FACTO CORPORATION: Therefore, they cannot claim in good faith to be and act as a corporation. This is the 4th requisite, Good Faith in claiming to be and doing business as a corporation 1. There must be a Law or an apparently Valid Statute, under which it may have been created as a De Jure Corporation; Absence of one of the requisites then it is not a corporation at all. Hence, any person in interest can therefore question its existence. 2. An attempt in Good Faith to form a corporation, according to the requirements of the law, which should go far enough as to amount to a Colorable Compliance with the law; Q. ARE THE RIGHTS, LIABILITIES, DUTIES AND OBLIGATIONS OF THE STOCKHOLDERS, DIRECTORS, OFFICERS OR MEMBERS OF A “DE FACTO” CORPORATION—THE SAME AS THOSE OF THE “DE JURE” CORPORATION? 3. User of Corporate Powers; 4. Good Faith in claiming to be and doing business as a corporation. All these requirements must be present. They must go hand in hand. Otherwise, it cannot exist as a corporation at all. In the case of Municipality of Malabagan vs. Benito, an Executive Order contrary to the provisions of the Municipal Code then, was issued by the President of the Philippines creating the Municipality of Malabagan. The said municipality cannot be considered as a De Facto Corporation. Its existence may therefore be attacked by any person in interest not only the Solicitor General. In this case, it was ruled that, citing the Pelaez Doctrine under the Constitution because again, the Corporation Code must be read in relation to other allied laws, An unconstitutional act is not a law. It confers no rights. It imposes no duties. It affords no protection. It creates no office. It is, in legal contemplation, inoperative, as though it had never been passed. Therefore, in this particular case, one essential requisite for its existence as a De Facto Corporation does not exist, there is no law or an apparently valid statute, under which it may have been formed or organized as a De Jure Corporation. Since an unconstitutional act is not a law, therefore this essential requisite is not present. It is not a corporation at all and its existence may be questioned by any person in interest. Yes. They have the same rights, liabilities, duties and obligations. They are subject to the same laws, rules and regulations that apply to a De Jure Corporation. The only importance of the distinction between a De Facto Corporation and a De Jure Corporation is for the purpose of determining the applicability of Section 20, on whether or not their existence as such may be attacked by another person. Existence of a De Jure Corporation cannot be attacked even by the State Existence of a De Facto Corporation can be attacked only by the state in a Quo Warranto proceeding. No other party can question the existence of a De Facto Corporation. CORPORATION BY ESTOPPEL Section 21. Corporation by estoppel. – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. (n) Section 21 does not define what a Corporation by Estoppel is. It merely provides for the consequences of those persons who assume to AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 16 AUSL/CORPORATION LAW REVIEWER/AJP-SFO be and act as a corporation, knowing it to be without authority to do so. They are liable as General Partners for all the Debts, Liabilities and/or Damages incurred or arising therefrom. Provided, when such ostensible corporation is sued on any transaction entered by it or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate capacity. Definition of a Corporation by estoppel However, in this case, the petitioner was not trying to escape liability from the contract, but was rather the one claiming under it. That being the case, he is not estopped or barred from claiming liability against the associates or the persons who assume to be and act as a corporation. (International Express Travel and Tours case) (3) Where there is no 3rd person involved (1) Neither a De Jure/De Facto corporation The corporation by estoppel is founded on principles of equity and it is designed to prevent injustice and unfairness. (2) By virtue of serious defects in its organization as a corporate body, but nevertheless exist as a corporate entity. It applies when persons assume to form a corporation, exercises corporate functions and enter into contracts with 3rd persons. (3) Only to those who cannot deny its corporate existence, either by virtue of their Agreement, Admission or Conduct. It may apply for or against the corporation, or for or against the 3rd party transacting with it. Where there is no 3rd person involved, then the conflict arises only between and among those assuming to form the corporation—who therefore know that it has not been registered. Hence, there is no Corporation by Estoppel. (Lozano v. Delos Santos) GR: A person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect, admits its existence as a corporation, cannot deny its juridical personality in an action arising therefrom. Section 21 speaks of the liability of the associates or the persons assuming to act as a corporation. Thus, if such be the case, if a person transacts business with a supposed corporation that does not exist he cannot allege lack of personality on the part of the supposed corporation to sue and that it has not been registered. (Asia Banking v. Standard Products) Q. WHO SHOULD BEAR THE LOSS? ALL OF THE ASSOCIATES OR ONLY THE ACTIVE ONES? XPN: This doctrine will not hold true, however, where: (1) Fraud takes part in the transaction. The plaintiff’s charge states that she was unaware of the fact that the association has no juridical personality. The defendant gave no confirmation or denial and the circumstances attendant to the execution of the contract led to the inescapable conclusion that the plaintiff was really made to believe that there was such a corporation duly organized in accordance with law. She cannot thus be estopped from denying that there is a corporation to speak of and prevent her from making the association personally liable, as provided for under Section 21 (Salvatiera v. Carlitos) (2) When he is trying to Escape Liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. The associates can be held liable as General Partners. Only those who Actively Participated in holding out the association as a corporate body should be held liable by virtue of the express provision in Section 21. This would be more in conformity with the rules governing agency under the Civil Code which would hold out: “An agent personally liable to the party with whom he contracts in cases he exceeds the limit of his authority without giving the other party sufficient notice of his powers. Thus, the Passive Shareholders or supposed stockholders or associates should be limited in their liability only to their agreed contribution. LIMITED SHAREHOLDERS’ LIABILITY in the corporate form of business. The stockholder’s liability is limited to the amount he subscribed. This is one of the advantages of the corporate form of business. XPN: Corporation by Estoppel AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 17 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. WILL THIS LIMITED SHAREHOLDERS’ LIABILITY APPLY TO PERSONS ASSUMING TO ACT AS A CORPORATION KNOWING IT TO BE WITHOUT AUTHORITY TO DO SO? No. Under the Civil Code, the “general partners” can be held liable even beyond their agreed contribution. This is the gist of Sec. 21. They are liable as General Partners. They can be held liable even beyond their agreed contribution or their particular subscription. There is no such thing as shareholders’ limited liability in a Corporation by Estoppel. CORPORATE ENTITY THEORY It is not affected by the personal rights, obligations or transactions of the latter. In the same vein, the stockholders, members or individual directors or officers are not also affected by the rights and obligations incurred or accrued for the corporation. Note that this is a General Rule, because we have the Doctrine of Piercing the Veil of Corporate Fiction THE VEIL OF This rule, same as above, the mere fact that the corporation happens to own all/substantially all of the shares of stocks of another corporation does not justify piercing the veil of corporate fiction and treating them as one. True, it is PNB who owns all the shares of stock of PNB-IFL. Therefore, it may have control over the business practices and policies of the PNBIFL. But did it use that control to commit a fraud/wrongdoing? No. it did not. The corporation is possessed with a personality separate and distinct from the stockholders or persons composing it. PIERCING FICTION The mere fact that the corporation happens to own all of the shares of stocks of another corporation, these are the wholly owned subsidiaries, will not justify piercing the veil of corporate fiction. (Del Rosario v. NLRC) CORPORATE Was it the proximate cause of the injury? No. it is not. (PNB vs. Ritrato Group) In Borromeo v. CA, the same ruling was reiterated. This rule finds its justification to the Instrumentality Rule, earlier enunciated in the case of Concept Builders vs. NLRC When one corporation is organized and controlled and its affairs are conducted so that it is a mere instrumentality or adjunct of the other the fiction of the Corporate Entity of the instrumentality may be disregarded. INSTRUMENTALITY RULE (1) There must be Absolute Control When the notion of the legal corporate entity is used: (1) To defeat public convenience; (2) Justify wrong; (3) Protect fraud; or Not mere majority or even complete stock ownership, but Domination, not only of finances but also of the policy and business practices in respect to the transaction attack so that the corporate entity has, at that time, no separate mind, will/existence of its own (2) Control must have been used by to commit Fraud or Wrong to perpetuate a violation of the plaintiff’s legal right. (4) Defend crime The law will regard the corporation as a mere association of persons or in the case of two (2) corporations, they will MERGE them into one. (3) The aforesaid Control must be Proximately cause the Injury or Unjust Loss complained of. The other being regarded merely as an Alter Ego, Business conduit, Adjunct Extension or Instrumentality of the other. Absence of any one (1) of these elements would prevent piercing the veil of corporate fiction. (PNB vs. Ritrato Group, Yamamoto vs. Shino Leather Industries) NB: For the separate personality of the corporation to be disregarded: AMENDMENT OF INCORPORATION The wrongdoing must Convincingly established. Section 16. Amendment of Articles of Incorporation. – Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds be Clearly and Fraud must be proven by Clear and Convincing evidence amounting to more than Preponderance. It cannot be justified by speculation and can never be presumed. AUSL/CORPORATION LAW REVIEWER/AJP-SFO THE ARTICLES P a g e | 18 OF AUSL/CORPORATION LAW REVIEWER/AJP-SFO (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendments shall take effect upon their approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. Unless otherwise prescribed by Special Law or this Code, and for legitimate purposes, any provision or matter stated in the Articles of Incorporation may be amended by (1) The Majority Vote of the Board of Directors or Trustees; and Q. THE PURPOSE CLAUSE WAS CHANGED FROM REALTY TO CONSTRUCTION. IT WAS FILED 8 MONTHS AGO AND SEC HAS NOT ACTED UPON IT. THE CORPORATION STARTED DOING BUSINESS AS A CONSTRUCTION COMPANY IN ACCORDANCE WITH THE AMENDMENT 5 MONTHS BACK. DID THE CORPORATION CARRY ITS POWERS AND FUNCTIONS IN ACCORDANCE WITH ITS ARTICLES? Yes. Because it was already valid on the date it was filed, 8 months ago. The voting requirement and the effectivity of amendment will apply only however, to Ordinary or Regular Amendments of the Articles of Incorporation It will not apply Amendments. in cases of Special (1) Extension or Shortening of the Corporate Term (Section 37 in relation to Section 120) (2) Increase or Decrease in Capital Stock (Section 38) In both cases, the 2/3 votes must be cast at the meeting during the meeting called for that purpose. The written assent of the Stockholder is not sufficient. The amendment will take effect: In Section 38, any decrease in the capital stock will never become valid and effective, until and unless the SEC gives its stamp of approval. Because the SEC will determine whether the decrease in capital stock will not prejudice the rights of 3rd parties. (1) Upon the Approval of the SEC; or BOARD OF DIRECTORS (2) From the date of its filing with the said Commission, if Not Acted Upon within six months from the date of filing, for a cause not attributable to the corporation. Section 23. The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) (2) The Vote or Written Assent of the Stockholders, representing at least 2/3 of the Outstanding Capital Stock Q. THE AMENDMENT WAS FILED 8 MONTHS BACK AND THE SEC HAS NOT ACTED UPON IT. IS THE AMENDMENT ALREADY VALID? Yes. It was valid not 6 months thereafter, but on the date it was Filed. It retroacts to the filing date. Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of nonstock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 19 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Unless otherwise provided for in the Code, All Corporate Powers, All Business are conducted, and All Properties are controlled by the board of directors They are the Corporate Managers and are thus the ones who can act for and in behalf of the corporation. GR: They must sit and act as a body at a validly held and constituted or conducted meeting to have a valid Corporate Act or Transaction Individual directors cannot bind the Corporation by their Individual Acts, except the following: 1. There is a Valid Delegation Of Authority; Q. ARE THERE ANY EXCEPTIONS TO THIS RULE OF QUORUM OR VOTING REQUIREMENT? (1) In the cases of Election of Corporate Officers. Vote of the majority of their entire number is required; (2) Unless the Articles of Incorporation or ByLaws require a higher Quorum or Voting requirement. The Articles and By-Laws may provide for a higher Quorum or Voting requirement in directors’ meetings. Q. WE SAY THAT THEY MUST SIT AND ACT AS A BODY TO HAVE A VALID CORPORATE ACT OR TRANSACTION. ARE THE DIRECTORS THEREFORE REQUIRED TO BE PHYSICALLY PRESENT TO HAVE A VALID MEETING? 2. When Expressly Conferred; 3. Where the officer or agent is clothed with Actual or Apparent Authority; 4. When Expressly or Impliedly ratified; or 5. And even perhaps by Estoppel Q. THE BOARD OF DIRECTORS OR BOARD OF TRUSTEES IN CASE OF A NON-STOCK CORPORATION HAS TO SIT AND ACT AS A BODY AT A DULY CONSTITUTED MEETING. WHAT IS THE QUORUM REQUIREMENT FOR A VALID DIRECTORS’ MEETING? WHAT IS THE VOTE REQUIRED? (1) Quorum requirement: Majority of the members of the Board as fixed in the Articles of Incorporation No. The E-Commerce Law allows them to meet via Teleconference or Video Conference. This is not yet available to stockholders. It is only to Directors or Trustees meeting. Directors or Officers are not liable for their acts for and in behalf of their corporation as long as: (1) They act in Good Faith; and (2) Within the Scope of their Powers And Authority Pursuant to the Doctrine of Corporate Entity Theory, Contracts or Obligations incurred by them, in their official capacity, is not theirs, but that of the Corporation which they represent. GR: BUSINESS JUDGMENT RULE (2) Vote requirement: In every decision of at least a majority of the directors or trustees are present at a meeting at which there is a quorum, may pass a valid corporate act. Q. IF THERE ARE 9 MEMBERS OF THE BOARD AS FIXED IN THE ARTICLES OF INCORPORATION, MAY THE VOTE OF 3 MEMBERS PASS A VALID CORPORATE ACT OR TRANSACTION? Yes. The Quorum requirement is 5, majority of their number as fixed in the Articles of Incorporation The vote of the majority present at which there is a quorum will pass a valid corporate act. Majority of 5 is 3 Questions of Policy and Management are left solely to the honest decisions of the Board of Directors. The courts are without authority to substitute its judgment as against the said Board of Directors. As long as they act in Good Faith, their actuations are not subject to judicial review. (Montelibano vs. Bacolod) XPN: Corporate Directors or Officers and/or agents may nonetheless be held liable Personally or Solidarily even if they are acting for and in behalf of the Corporation: 1. When he assents to Patently Unlawful act or Bad Faith or Gross Negligence in directing the corporate affairs or for conflict of interest resulting in damages to the corporation, its stockholders/other persons as provided for in Section 31. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 20 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. Q. IF A CORPORATE OFFICER, THE TREASURER AND THE PRESIDENT, PAYS A CORPORATE OBLIGATION IN FAVOR OF THE CREDITOR, AND THE CHECK THAT WAS USED TO PAY ITS OBLIGATION BOUNCED, MAY THE CORPORATE OFFICER WHO SIGNED THE CHECK ADVANCE THE CORPORATE ENTITY THEORY TO FREE HIMSELF FROM ANY LIABILITY? When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n) The liability of the corporate directors may also be based on the fact that they owe a 3-Fold Duty to the corporation and the stockholders as a body. 2. If he consents to the issuance of Watered Stocks, or Craving due knowledge thereof does not forthwith file his written objections with the corporate secretary, as provided for in Section 65. Section 65. Liability of directors for watered stocks. – Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (n) 3. When he agrees to hold himself personally or solidarily liable with the corporation. 4. He is made by Specific Provision of the Law to Personally Answer for his corporate acts. Example: In the case of the Bouncing Checks Law Sec. 1 of the Bouncing Checks Law provides that if a check is drawn by a corporation, the person or persons who signed the check shall be Personally Liable. No. Because he is made to be Personally Liable by a Special Law. (Bouncing Checks Law) DUTY OF LOYALTY FORBIDDEN PROFITS RULE Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation. (n) Section 34. Disloyalty of a director. – Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture Directors are considered in Equity as bearing a Fidiuciary Relation to the corporation and the stockholders as a whole. Section 31 provides that Directors are liable Jointly and Severally for Damages if they acquire any personal or pecuniary interest in conflict with their duty of loyalty, as such director. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 21 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Section 34 provides that, where a director, by virtue of his office acquires for himself a business opportunity which should belong to the corporation, thereby, obtaining profits to the prejudice of such corporation, he must account to the latter the corporation, all profits, by refunding the same. Notwithstanding the fact, that he may have risked his own funds in the specific venture. Unless, his act has been ratified by a vote of at least 2/3 of the Outstanding Capital Stock. This is the Forbidden Profits Rule. Forbidden in a sense that Directors are Fidiuciary Representatives of the corporation and the stockholders as a body. Such that, they are not allowed to obtain any Personal Profit, Commission, Bonus or Gain for their Official Actions. This may also refer to: 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances. (n) (1) Those arising out of transactions of directors with 3rd persons which may involve what is called as Misappropriation of Corporate Opportunities; An Interlocking Director is a director of a corporation wherein he transacts business with another corporation, and he also sits in that corporation also as a director. (2) Disloyal Diverting Of Business. This is otherwise known as the Corporate Opportunity Doctrine. Section 33. Contracts between corporations with interlocking directors. – Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. CORPORATE OPPORTUNITY DOCTRINE Places a director of a corporation in the position of a Fidiuciary, and prohibits him from seizing a business opportunity and of developing it at the expense of the facilities of the corporation. He cannot appropriate to himself a business opportunity, which in fairness, should belong to the corporation. NB: Section 34 will apply, notwithstanding the fact that the director risked his own funds in the venture. SELF-DEALING DIRECTORS AND INTERLOCKING A Self-Dealing Director is one who enters into a contract, or transacts business with his own corporation. Section 32. Dealings of directors, trustees or officers with the corporation. – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for purposes of interlocking directors. (n) GR: Contracts of Self-dealing Directors are generally Voidable, at the option of the corporation. XPN: They are valid per se if all the requisites or conditions set out in Section 32 are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. The contract is Fair and Reasonable under the circumstances; AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 22 AUSL/CORPORATION LAW REVIEWER/AJP-SFO There is no legal yardstick as to when a contract is fair and reasonable. ELECTION OF THE MEMBERS OF BOARD It is always a Question of Fact whether it is beneficial to both. The members of the Board, whether they be Stock or Non-Stock are to be elected by: 4. That in case of an officer, the contract has been previously authorized by the board of directors. (1) The stockholders and/or If any of the first 2 conditions will be absent, the contract is voidable and thus, subject to ratification by at least 2/3 of the Outstanding Capital Stock at a meeting held for that purpose. The non-voting shares have no voting rights in the election of the Corporate Directors. Provided that, full disclosure of the adverse interest of the director involved is made and the contract is Fair and Reasonable. GR: The contract of an Interlocking Director is generally valid. XPN: Except in cases of Fraud and when the Contract is not Fair and Reasonable. A contract between two more corporations having Interlocking directors shall not be invalidated on that ground alone. THE (2) Members entitled to vote. Quorum requirement: Majority of the Outstanding Capital Stock or Members entitled to vote Non-voting shares are said to be not included in determining the quorum requirement and voting requirement imposed by law as per last paragraph of Section 6. Q. WHAT IS THE VOTING REQUIREMENT IN ORDER THAT A DIRECTOR MAY BE CONSIDERED AS ELECTED? None, the only requirement is the candidates receiving the Highest number of votes. Q. QUORUM REQUIREMENT? XPN to the XPN: Majority of the Outstanding Capital Stock If the interest of the interlocking director in one corporation is Substantial and his interest in the other corporation is merely Nominal, then the provisions of the preceding Section, provisions governing Self-Dealing Directors, will apply. Meaning, the contract will be Voidable also. NB: Stockholding in Excess of 20% is Substantial for purposes of determining whether the contract of the Interlocking director is Voidable or Generally Valid application. Q. MR. X IS A STOCKHOLDER IN A CORPORATION AND HOLDS 25% OF ITS OUTSTANDING CAPITAL STOCKS. HE IS ALSO A STOCKHOLDER IN B CORPORATION AND ALSO OWNS 22% OF ITS OUTSTANDING CAPITAL STOCKS. A AND B CORPORATIONS ENTERED INTO A CONTRACT. IS THE CONTRACT GENERALLY VALID OR GENERALLY VOIDABLE? WILL SECTION 32 APPLY OR SECTION 33? Section 33 will apply, because his interest in both Corporations are Substantial, more than 20% in both corporations. Section 33 says if it is Substantial in one and nominal in the other it will be voidable. It will be subjected to Section 32. If they are both Substantial or both Nominal, it is Section 33 that will be applicable. The contract is Generally Valid. Q. X HAS ONLY 1 SHARE. THERE ARE 5 CANDIDATES AND X IS THE 5TH, HE HAS ONLY 1 SHARE. IS HE ELECTED? Yes. He is the 5th candidate receiving the highest number of votes. The candidate receiving the highest number of votes gets elected. Not majority of the outstanding capital stock but rather, the number of votes cast in his name. Stockholders may avail of their Cummulative Voting, right to cumulate their vote, in a Stock corporation. CUMULATIVE VOTING Multiplying the number of shares held by the particular stock holder by the number of directors to be elected. No. of Shares Held x No. of Directors to be elected Total Number of Votes Example: You are holding 100 shares; 5 directors are to be elected; How many votes can you cast? 100 x 5 = 500 votes These 500 votes may be: (1) Cast to a single person only, or (2) Distributed to as many candidates as you may deem fit and proper. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 23 AUSL/CORPORATION LAW REVIEWER/AJP-SFO This was included in the Corporation Code for purposes of getting the minority the right of representation in a Stock Corporation. GR: One year until their successors have been duly elected and qualified, in accordance with law. Q. MINORITY HAS 20% STOCKHOLDINGS. THE OTHER 80% OF SHARES ARE HELD BY ONE SINGLE FAMILY 5 SIBLINGS, MAJORITY CONTROL THE 80%; THERE ARE ALSO 5 MINORITY, NOT RELATED TO THE MAJORITY AND NOT RELATED TO ONE ANOTHER? XPN: If the 20% shares of the minority are pulled multiplied by the number of the directors to be elected, they are guaranteed one seat in the board. This is why you have cumulative voting. If there is no election, and their term of office already expired, naturally, by virtue of this provision, they shall serve for a term of one year until their successors are duly elected and qualified, then they can continue acting as directors in a hold-over capacity. 100 shares is the OCS; Minorities are holding 20 shares and there are 5 directors to be elected. 20 x 5 = 100 votes If these 100 votes are cast in favor of one of the minority, the minority is guaranteed one seat No matter what the Majority Stockholders do, they cannot outvote the minority. They can only elect (4) members of the Board. The 20% and the 80%, equivalent to 400 votes Cumulative voting is a matter of right granted to stockholders in a stock corporation. By virtue of the Doctrine Of Limited Capacity, it cannot be denied in a stock corporation. A corporation can only do such acts and things as the allow it. GR: In a Non-stock Corporation cumulative voting is generally not allowed, as provided for in section 89. XPN: Provisions of Title 11 are clear and specific: “The Articles of Incorporation or By-laws of a non-stock corporation may Broaden, Limit or Deny voting rights of the members.” So, the Articles of Incorporation or By-Laws may also allow Cumulative voting. But if there is none, they are not entitled to Cumulative voting. DIRECTOR’S TERM OF OFFICE Section 23 (1). The board of directors or trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) 1. In a Non-Stock Corporation, they can serve for three years under Title 11 2. In Educational Corporations they can serve for a term of five years DISTINCTION BETWEEN TERM AND TENURE (Valle Verde Country Club vs. Africa) Term Fixed by law Tenure Represents the term during which the incumbent actually holds Office. The time during which the officer may claim to hold office as a matter of right and fixes the interval after which the several incumbents shall succeed one another Not affected by the hold-over. The term is fixed by law and it does not change simply because the office may have become vacant. May be of longer or shorter duration Where an incumbent holds his office beyond the end of his term due to the fact that a successor has not been elected or has failed to qualify, Tenure may be of longer or shorter duration. Term is fixed by law. Example: (1) June 8 of last year he was elected. On December he resigned, the tenure was shortened. (2) June 8 of last year he was elected. No election was held. In effect, there is a holdover. The tenure is extended. But the Term is fixed by law, one year, that’s the period or time where one may claim office as a Matter of Right. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 24 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Directors and other Officers may be Removed or Ousted from office. Section 28. Removal of directors or trustees. – Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (n) removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting. (n) Only the Stockholders or Members can remove directors or trustees elected by them. They cannot be removed or ousted by their fellow Directors. It must be at a Stockholders’ Meeting. (Raniel v. Fuchiko) Q. SO IF THERE IS A VACANT SEAT BY VIRTUE OF A REMOVAL OR OUSTER OF A DIRECTOR, MAY THE VACANCY CREATED BY VIRTUE OF THE REMOVAL OR OUSTER BE FILLED UP BY THE BOARD OF DIRECTORS THEMSELVES IF THEY STILL CONSTITUTE A QUORUM? No, only the stockholders can fill up the vacancy created by virtue of removal or ouster. Section 29 provides that any vacancy occurring in the Board of Directors or Trustees, other than by removal or expiration of term, may be filled up by the vote of the majority of the remaining directors, which is still constituting a quorum. With or Without Cause by at least 2/3 of the Outstanding Capital Stock or 2/3 of the members, in case it is a Non-Stock Corporation So if it is caused by removal or expiration of the term of office, then only the stockholder can fill up the vacancy. The law, however, is categorical that Removal Without Cause shall not deprive the minority of their rightful representation to which they may be entitled. Q. MAY THE REMAINING MEMBERS OF THE BOARD OF DIRECTORS, IF STILL CONSTITUTING A QUORUM, FILL UP A VACANCY CREATED BY THE REMOVAL OF A HOLD-OVER DIRECTOR? Q. MINORITY WERE ABLE TO VOTE ONE DIRECTOR IN A 5-MAN BOARD BY CUMULATING THEIR VOTES. SO THEY NOW HAVE A REPRESENTATION IN THE BOARD. MAJORITY HAS 80% STOCKHOLDINGS. CAN THEY REMOVE OR OUST THAT ELECTED DIRECTOR REPRESENTING THE MINORITY? Supposedly, Yes. Because they own 80%. 2/3 is only 66.67%, but it cannot be done, because the minority is entitled to representation. EXAMPLE: JUNE 8 OF LAST YEAR HE WAS ELECTED. JUNE 8 OF THIS YEAR, NO ELECTION WAS MADE. THERE WAS THEN A HOLD-OVER. DECEMBER OF 2013, HOLDOVER DIRECTOR RESIGNED. MAY THE REMAINING MEMBERS OF THE BOARD OF DIRECTORS FILL UP THE VACANCY CREATED BY THE RESIGNATION OF THE HOLD-OVER DIRECTOR? No. Because his term of office has already expired. Term, as said, is fixed by law. As a general rule, One year until their successors are duly elected and qualified in accordance with law. Section 29. Vacancies in the office of director or trustee. – Any vacancy occurring in the board of directors or trustees other than by AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 25 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The hold-over period, that time from the lapse of 1 year from the director’s election to the office until his successor’s election and qualification is not of the director’s original term. nor is it a new term. The hold-over period, however, constitutes part of his tenure. Corollary, where the incumbent member of the Board of Director continues to serve in a hold-over capacity, it implies that the office has a fixed term, which already expired. Therefore, since the term of office has already expired only the stockholders can fill up the vacancy. (Valle Verde v. Africa) Section 29 provides “The remaining members of the Board, if still constituting a quorum, except by removal/expiration of a term may fill up a vacancy created in the Board of Directors.” So much so that if the hold-over director resigns, only the stockholders can fill up the vacancy. Q. MAY THE STOCKHOLDERS FILL UP VACANCY CREATED BY REMOVAL AT THE SAME MEETING WHERE THE REMOVAL TOOK PLACE WITHOUT ANY NOTICE? Yes. Section 29 provides that it may filled up at the same meeting without further notice. Q. MAY A DIRECTOR ACTING IN A HOLDOVER CAPACITY BE REMOVED FROM OFFICE AT ANY TIME AND WITHOUT CAUSE? Yes. One occupying an office in a hold-over capacity could be removed at any time without cause upon the election and appointment of his successor. (Barrayoga v. Adventist University) Section 30. Compensation of directors. – In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. (n) (3) If there is a grant by the Stockholders owning or representing at least a Majority of the Outstanding Capital Stock (4) When they render Unusual Ordinary Service or Services. or Extra- Section 30 also provides a ceiling compensation of the directors, if of granted to the effect that it shall not 10% of the net income before tax corporation during the preceding year. of the course exceed of the Section 30 uses As Such Directors, so as to generally deny them compensation. In Western Institute of Technology vs. Salas, the words As Such Directors in Section. 30, delimits the scope of the prohibition to compensation given to directors for services performed purely in their capacity as directors or trustees. The Supreme Court held that an unambiguous interpretation is that, they may be given compensation, even by a mere grant of the board of directors, by a mere board resolution through of course, a valid resolution, even without any grant or authority from the bylaws or from the stockholders, when they render services in a capacity other than as such directors. Thus, if they are acting in a capacity other than such director and the board of directors passed a resolution granting themselves compensation in their capacities as President, Secretary, Treasurer and Chairman of the Board of Directors and one of the stockholders questioned the validity of the grant because it requires stockholders’ approval or a grant of a by-law provision, the Court ruled that they are entitled to compensation because they are not acting in their regular or ordinary capacity as such directors. Likewise, the ceiling of 10% of the net income of the corporation for the preceding year will not also apply if the compensation granted them is other than in their ordinary or regular capacities as directors. So even if the 10% ceiling is breached, if it is given to them in their capacity also as President, Secretary, Treasurer or Chairman of the Board, Section 30 will not thereby be violated. GR: Directors are not entitled to Compensation CORPORATE POWERS AND AUTHORITY XPN: A corporation is an artificial being existing only in contemplation of the law and can thus, only do such acts and things as the law allows it to do, as provided for in the Doctrine of Limited Capacity in the Corporate Form. (1) Reasonable per diem (2) If there is a by-law provision allowing or granting the same AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 26 AUSL/CORPORATION LAW REVIEWER/AJP-SFO These corporate powers and authority includes: (1) Those that are Expressly Granted by law in Section 36 to 45. Section 36: Corporate Powers and Capacity Section 37: Power to extend or shorten corporate term Section 38: Power to increase or decrease capital stock; incur, create or increase bonded indebtedness Section 39: Power to deny pre-emptive right Section 40: Sale or other disposition of assets Section 41: Power to acquire own shares. Section 42: Power to invest corporate funds in another corporation or business or for any other purpose Section 43: Power to declare dividends Section 44: Power management contract. to enter 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; into Section 45: Ultra vires acts of corporations. (2) Those that are CONFERRED—by articles of incorporation; 4. To amend its articles of incorporation in accordance with the provisions of this Code; the Once the SEC issues a certificate of registration, the government, through that instrumentality of the SEC already conferred upon that juridical entity the corporate power to carry out the purpose or purposes indicated in the articles of incorporation, those that are Necessary or Incidental to its existence. If they exercise such powers and functions beyond any of them, the act performed is what is called Ultra Vires Act, allowing the contracting parties or any of them to Collaterally Attack the validity thereof for being beyond corporate powers. Ultra Vires Contracts are therefore those that cannot be performed or exercised by the corporation because it is beyond the Express, Inherent or Implied Powers or Authority. 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. (13a) POWER TO SUE AND/OR BE SUED Q. UPON WHOM SERVICE OF SUMMONS IS TO BE MADE? GR: Section 11, Rule 14, Rules of Court (1) President; (2) Managing Partner; Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the power and capacity: (3) The General Manager; 1. To sue and be sued in its corporate name; (5) The Treasurer; or 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; (6) The In-House Counsel. 3. To adopt and use a corporate seal; (4) The Corporate Secretary; It may only be served unto them because a strict compliance with the mode of service is necessary to confer jurisdiction over the person of the Corporation. The officer upon whom AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 27 AUSL/CORPORATION LAW REVIEWER/AJP-SFO service is to be made must be one who is named in the statute. The words ‘Any of the Directors’ in the old rule and ‘Agent’ was deliberately omitted in the New Rules of Court. So much so that the liberalized service of summons no longer applies (EB Villarosa and Partners v. Benito) Justice Regalado: “The then Sec. 13 of Rule 14 allowed service upon a defendant corporation to be made to the President, Manager, Secretary, Agent, Cashier, Any of the Directors or Agents, the aforesaid terms were obviously ambiguous and susceptible of broad and oftentimes illogical interpretations. Especially the word ‘Agent of the corporation.” In the Filoil Case, litigation lawyer made a special appearance precisely to question the validity of the service of summons made upon a person not named in the statute whose very appearance was ceased upon by the Court to say that he is considered as an ‘Agent’ of the corporation. The absurd decision in this case necessitated amending the particular section in the Rules of court permitting for instance, service of summons only to the In-House counsel. He is not yet the in-house counsel. He is there only specially appearing to question the validity of the service of summons. Noteworthy, the Corporation may be sued only in the City or Municipality where it has its Principal Office, because the principal office establishes the residence of the Corporation, if it is NOT based on a written contract. If it is based on a written contract, the parties may stipulate as to venue of actions. (Clavecilla Radio Systems v. Antillon) POWER TO ISSUE SHARES OF STOCKS OR TO ADMIT MEMBERS The power to issue shares is lodged in the Board of Directors. No stockholders’ meeting is required to consider it because additional issuance of shares of stock does not need the approval of the stockholders. What is only required is a valid board resolution allowing the issuance of additional shares. (Ruby Industrial Corporation v. Lim) This is consistent with the rule that Stockholders may have all the profits but shall turn over the day-to-day management of the corporate affairs to the governing Board of Directors who, under the Corporation Code, provides that, All Corporate Powers, All Business are conducted and All Properties are controlled by the said Board, unless, of course, the law requires Stockholders’ Intervention. Example: XPN: Section 5, Rule 2, Interim Rules governing Corporate Controversies This rule, however, will not hold true if it is an Intra-Corporate controversy, a controversy arising between and among the stockholders, directors, officers or between any or all of them and the corporation. (1) Investment of Corporate Fund in another business or purpose other than the Primary purpose. It has to be approved by at least 2/3 of the Outstanding Capital Stock or the Stockholders owning or representing at least 2/3 of the Outstanding Capital Stock Under the Interim Rules governing corporate controversies, particularly Sec. 5, Rule 2 thereof: (2) To enter into mergers or consolidations. If the defendant is a Domestic Corporation: The law likewise requires the intervention of stockholders owning or representing at least 2/3 of the Outstanding Capital Stock. Service shall be deemed adequate if made upon any of the Statutory Officers, as fixed in the ByLaws or their respective Secretaries). A director is, of course, a statutory officer of a corporation. We know that they are corporate managers. So if it is Intra-Corporate, and it is served upon any of the directors or even any officer as provided for in the by-laws, if there is such a thing as assistant finance manager in the bylaws and it is served unto him, it is valid. It goes further by including their respective secretaries”. The ruling in EB Villarosa and Partners vs. Benito will apply only if the corporation is sued by a 3rd party. RIGHT TO PROPERTIES. ACQUIRE OR ALIENATE TWO LIMITATIONS: 1. As the Lawful Transaction of its business may reasonably require. In the case of Luneta Motors vs. AD Santos, Luneta Motors acquired a Certificate of Public Convenience for operation of taxi services. It was the winner of an auction sale for that particular Certificate of Public Convenience. The losing bidder went to court questioning the validity of the acquisition of the said certificate of public convenience. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 28 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The Supreme Court held that Luneta Motors cannot acquire the certificate of public convenience. It took note of the Articles of Incorporation and ruled that, while it is true that Luneta Motors may engage in the transportation business by water, it is not authorized to engage in land transportation business. Since it is not as the lawful transaction of its business reasonably require, the Court ruled that it cannot acquire the certificate of public convenience. In the case of Tambunbi v. Jarencio, one of the reasons why the Court pierced the veil of the corporate fiction of the corporation there involved is that, it is claiming that it owns the American drug company engaged in the distribution of drugs. It is claiming that it owns a printing machine belonging to a sister company which is engaged in printing. The court stressed, how can you have a printing machine? What do you need a printing machine for when you’re engaged in the distribution of drugs? It is not as the lawful transaction of its business reasonably require. 2. Limitations imposed Constitution. by law or the Corporations, juridical entities can, like any other natural persons, acquire lands and register the same in their own names. But there is a Constitutional provision that says, it cannot register lands of the public domain. It may hold such land of the public domain only by way of lease under the constitution for a particular number of area and number of years. However, there is an exception. In the case of Director of Lands vs. Court of Appeals, the effect that land of the public domain may be converted into private property by the mere lapse of (30) years, if it is held by a possessor or his predecessor-in-interest continuously in concept of an owner, openly, for the statutory period of (30) years, if that be the case, it is converted into private property and thus, it may be registered by a juridical entity. POWER TO EXTEND OR CORPORATE TERM SHORTEN the Section 37. Power to extend or shorten corporate term. – A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code. (n) It may be extended or shortened by an amendment of the Articles of Incorporation by a majority vote of the directors subject to the ratification of the stockholders owning or representing at least 2/3 of the Outstanding Capital Stock at a meeting duly called for that purpose. In extension or shortening of the corporate term, Section 37 is categorical; the vote must be cast at the meeting called for that purpose. Written assent will not be sufficient. Section 11 provides that the extension of the original terms, as indicated in the Articles of Incorporation shall be made: (1) Not earlier than five years prior to the expiration of the term indicated in the Articles of Incorporation. (2) Unless there are Justifiable Reasons for an earlier extension, as may be determined by the SEC. POWER TO INCREASE OR DECREASE THE CAPITAL STOCK OR TO CREATE, INCUR BONDED INDEBTEDNESS Section 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. – No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholder’s meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholder’s meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 29 AUSL/CORPORATION LAW REVIEWER/AJP-SFO secretary of the stockholders’ meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twentyfive (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission, which shall have the authority to determine the sufficiency of the terms thereof. (17a) Q. WHAT ARE THE MODES OF INCREASING THE CAPITAL STOCK? If the capital is originally 1M divided into 1M shares with a par value of P1.00 per share, you can increase the capital stock in either of the three ways: 1. Increasing the no. of shares to 2M, without increasing the par value you arrive at an additional 1M increase in capital stock; or 2. You may retain 1M no. of shares and increase the par value; or 3. You increase both, for example, 1.5M shares for P1.50 per share, you will arrive at an increase of additional 1M in the capital Q. WHY SHOULD A CORPORATION INCREASE ITS CAPITAL STOCK? For acquisition of business or to expand its business Q. LIMITATION IMPOSED IN DECREASING THE CAPITAL STOCK No decrease in capital stock shall be allowed if it will prejudice the rights of the creditors or other 3rd parties. This is why the SEC is duty bound to determine whether or not to approve or allow a decrease in capital stock. It will never become valid and effective until the SEC gives its stamp of approval. Q. WHAT ARE THE MODES OF DECREASING CAPITAL STOCK? Just do the reverse of the modes to Increase 1. Decrease the number of shares without decreasing the par value; 2. Decrease the par value without decreasing the number of shares; or AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 30 AUSL/CORPORATION LAW REVIEWER/AJP-SFO 3. Decrease both the number of shares and the par value. Q. WHY SHOULD A CORPORATION DECREASE ITS CAPITAL, CONSIDERING THAT IT MAY NOT DO SO IF IT WILL PREJUDICE THE RIGHTS OF CREDITORS OR OTHER 3RD PERSONS? There must be a valid reason for decreasing the capital stock because it may be a violation of the Trust Fund Doctrine. If it is decreased, the capital is decreased and it will be violative of this Trust Fund Doctrine then the SEC will not allow a decrease in capital stock. TRUST FUND DOCTRINE Subscriptions to capital stock, inclusive of the unpaid portion thereof, constitutes a fund which the creditors have a right to rely upon the satisfaction of their claims. 1. To reduce or wipe out existing deficits where creditors will not thereby be affected. The corporation has 10M authorized capital. It used up 5M to manufacture toys for kids of young ages. After the production, it was discovered that the toys contain a material dangerous to the health of children. The corporation, instead of selling it openly to the public, burned these toys. There is a deficit now of 5M. It can reduce now the value of its capital stock because no creditor will be affected. This is a valid reason. 2. To reduce or wipe out Capital Surplus If the capital is more than necessary to procreate the business. You put up a corporation and you plan to build a grocery store in a city but mayor of the city already has 5 grocery stores. The mayor does not want to give you a permit to open another grocery store. So instead, you built a Sari-Sari Store. But your capital is 10M. In this case, you can decrease your capital stock. 3. To write down the value of fixed assets if there is a decline in their actual value. You put up Transport services with a capital stock of 10M. This 10M was used to purchase 1.3J Toyota vios at P500,000.00 per piece. You bought 20 of these. In the ordinary wear and tear, in 2 years, the value of these cabs went down to P250,000.00 and these are the only assets of the corporation. You can also decrease the capital stock to that same extent of the depletion of the value of the fixed assets because also, no creditors will thereby be affected. POWER TO DENY PRE-EMPTIVE RIGHTS Section 39. Power to deny pre-emptive right. – All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Pre-emptive right is the right granted by law to all existing stockholders to subscribe to all issues or dispositions of shares of any class so as to maintain the respective proportionate interest in the corporation, that is, their voting and dividend rights. If you are holding, for instance, 10% of the OCS of a corporation, and the corporation issues additional 1M shares of stocks, being a holder of 10% of the Outstanding Capital Stock, you are entitled to subscribe to 10% of the 1M that will be issued by the corporation so that you will retain your 10% dividend right and voting right for that matter. If you did not subscribe, then definitely, there will be a depletion of your voting and dividend right. Q. May this right be denied? How? The Articles of Incorporation or the Amendment of the Articles may deny the stockholders their right of Pre-Emption. XPN: (1) If they are to be issued in compliance with the law in requiring the minimum stock ownership by the public. (2) If they are to be issued in good faith with the approval of the stockholders representing at least 2/3 of the Outstanding Capital Stock either in exchange of property needed by the corporation or in payment of previously incurred indebtedness. The validity of issuance of additional shares may be questioned if done in breach of trust. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 31 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Thus, even if the pre-emptive right does not exist, either because the issue comes within the exceptions provided for under Section 39, or because it is denied or limited by a provision in the articles of incorporation, the issue of shares may still be objectionable if: XPN to the XPN: (1) The directors acted in breach of trust; and (2) Their primary purpose is to perpetuate a shift of control of the corporation or to freeze out the minority interest. You increased your capital because the articles do not allow the exercise of stockholders’ preemptive rights. But the purpose is to freeze out the minority. The minority was able to elect a representative in the Board because of cumulative voting. The 20% capital was increased by another 1M. (1M is the ACS). Minority was not able to exercise their right of pre-emption because it was denied in the provision in the articles. They can no longer vote a representative because their 20% was reduced to 10%. You can question that. Corporation v. Lim) (Ruby Industrial Section 39 provides, ‘All issues or disposition of shares of any class’ In earlier cases, Benito vs. SEC and Dy vs. SEC, the Supreme Court excluded from the coverage of the right of pre-emption originally unsubscribed portion of the Original Capital Stock. Example: Authorized Capital Stock is 1M; number of shares subscribed is 250,000; so there’s a free portion of 750,000 left unsubscribed. If the corporation will subsequently issue the the remaining 750,000 unsubscribed shares, then, the Supreme Court held, in these two particular case, that it does not extend to originally unsubscribed shares. When a corporation, at its inception, first offered its shares or subscription it is deemed to have offered ALL of its authorized shares for subscription of the stockholders. A stockholder cannot, thus, complain, to a dilution of his interest if the corporation later offers the unsubscribed portion for subscriptions to other persons because he is deemed to have waived his right of pre-emption if that be the case. It appears however, that although these rulings were handed down during the effectivity of the Corporation Code, which became effective May 1, 1980, the facts obtaining in these 2 particular cases were placed before Corporation Code became effective. the And the wording of the law now is very clear and specific: “Existing stockholders shall have the right to subscribe to all issues or disposition of shares of any class”, even Treasury Shares are now also covered. Q. WHAT TYPES OF SHARES ARE COVERED BY THESE PRE-EMPTIVE RIGHTS? ALL TYPES OF SHARES. The Pre-emptive rights of a stockholder in a Close Corporation, if not denied also by a provision in the Articles of Incorporation, is Absolute. Meaning, those instances provided for under Sec. 39, as to when a stockholder may nonetheless be able to exercise the right of pre-emption, that is, (1) Those issued in compliance with the law requiring minimum stock ownership by the public; and (2) Those issued in good faith, with approval of the stockholders owning or representing at least 2/3 of the outstanding capital stock, either in exchange of property needed by the corporation or for previously incurred indebtedness Will not apply to a stockholder in a Close Corporation Section 102. Pre-emptive right in close corporations. – The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. Q. MAY A STOCKHOLDER WHO HAS NOT PAID HIS SUBSCRIPTION IN FULL OF THE CAPITAL STOCK—BE ABLE TO EXERCISE HIS RIGHT OF PRE-EMPTION? Yes, by virtue of Sec. 72. Section 72. Rights of unpaid shares. – Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder. (n) POWER TO DISPOSE OF ALL OR SUBSTANTIALLY ALL OF THE CORPORATE ASSETS AND/OR PROPERTIES Section 40. Sale or other disposition of assets. – Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 32 AUSL/CORPORATION LAW REVIEWER/AJP-SFO mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. Q. WHEN IS A SALE OR DISPOSITION CONSIDERED AS SUBSTANTIAL SO AS TO REQUIRE STOCKHOLDERS’ APPROVAL FOR ITS VALIDITY? If the corporation would be rendered incapble of continuing business or accomplishing the purpose for which it was incorporated = then the approval of the stockholders would be required for its validity. Q. THE CORPORATION IS ENGAGED IN REALTY BUSINESS. THE PRIMARY PURPOSE SAYS THAT: “THE CORPORATION IS FORMALLY ORGANIZED FOR THE PURPOSE OF OWNING, ACQUIRING, DISPOSING OR SELLING ANY AND ALL TYPES OF REAL PROPERTIES”. THE CORPORATION HAS THE PIECE OF PROPERTY IN BCDA AREA. THE CORPORATION, THROUGH A BOARD RESOLUTION, NOW DECIDES TO SELL THAT PIECE OF PROPERTY. IS THE STOCKHOLDERS CONSENT OR APPROVAL REQUIRED EVEN IF THAT IS THE ONLY PROPERTY OF THE CORPORATION? No. Section 40 provides, that if the sale or disposition is in the Usual or Regular course of its business, stockholders’ approval is not required for its validity or if the proceeds are to be appropriated for the conduct of its remaining business, stockholders’ approval is not required for its validity even if that is the only property of the corporation.” Q. THE CORPORATION IS ENGAGED IN THE MANUFACTURING BUSINESS AND IT HAS A PROPERTY LOCATED IN ABCD AREA WHERE IT HAS ITS FACTORY/PLANT, WAREHOUSE, INVENTORIES AND OFFICES. IT SELLS ITS PLANT. WILL IT REQUIRE STOCKHOLDERS’ APPROVAL? GR: Supposed to be, Yes, because if it has no more plant, it is no longer capable of continuing the business for which it was organized. XPN: But the intention, however, is that, so that the corporation will be able to acquire more modern or complex facility. If that be the case, then stockholders’ approval will not be required because the proceeds are to be appropriated for the conduct of its business. If the corporation sells disposes all or substantially all of its assets and/or properties. The stockholders or members consent or approval is required for its validity, 2/3 of the Outstanding Capital Stock, or 2/3 of the members, in cases of a non-stock corporation. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 33 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. WILL THE ACQUIRING CORPORATION OR WILL THE PURCHASER BE LIABLE FOR THE DEBTS AND OBLIGATIONS OF THE SELLING CORPORATION IF THE ASSETS AND PROPERTIES ARE SOLD OR SUBSTANTIALLY ALL OF THE ASSETS ARE SOLD TO A 3RD PARTY. WILL THE PURCHASER, THE 3RD PARTY BE LIABLE FOR THE DEBTS AND OBLIGATIONS OF THE SELLING CORPORATION? GR: No, by virtue of the Corporate Entity Theory. In the case of Yu vs. NLRC, Twin Ace Holdings acquired all the assets and properties of Tanduay Distillery Inc. There was a labor problem and the laborers won after Twin Ace acquired all the assets of Tanduay Distillery. The laborers now wanted to enforce the award against Twin Ace Holdings. The Supreme Court held that Twin Ace exists separately and independently from Tanduay Distillery Inc. It is not liable for the debts and liabilities of the selling corporation. XPN: 1. Where the purchaser expressly or impliedly agrees to assume such debts or liabilities; 2. Where the transaction amounts to a merger or consolidation under Section 80. The debts and liabilities of the constituent corporations will accrue for and in behalf of the absorbing or consolidated corporation without further act and deed. 3. Where the purchasing corporation is a mere continuation of the selling corporation; 4. Where the transaction is entered into fraudulently in order to escape liability for such debts and/or obligations. POWER TO ACQUIRE ITS OWN SHARES Section 41. Power to acquire own shares. – A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (a) Q. WHAT MAY BE A LEGITIMATE PURPOSE FOR A CORPORATION TO ACQUIRE ITS OWN SHARES? 1. To eliminate fractional shares—arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation arising out of unpaid subscription in a delinquency sale and to purchase delinquent stocks sold during that sale; 3. To pay dissenting or withdrawing stockholders entitled thereto, as provided for in Section 81; 4. To redeem redeemable shares; 5. To pay withdrawing stockholders in a close corporation, as provided for in Section 105; 6. To eliminate capital surplus; NB: This is not exclusive because the law provides that “including but not limited to the following” GR: The Corporation must have Unrestricted Retained Earnings. XPN: 1. Redemption of redeemable provided for in Section 8. shares, as 2. Withdrawing stockholders in a Close Corporation; A stockholder in a close corporation may, for any reason, withdraw therefrom and compel the corporation that he be paid the value of his shares. Provided only that the corporation has sufficient assets to cover debts and liabilities exclusive of capital, as provided for in Section 105. 3. In cases of Deadlocks in a Close Corporation; the remedy available is for a stockholder to file a case in court to settle the matter in cases of deadlocks. The court, the proper forum, may appoint a provisional director in order to break the deadlock. The court or the provisional director may compel any stockholder to sell his shares in favor of the corporation irrespective of the existence of unrestricted retained earnings, as provided for in Section 104. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 34 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. A IS A STOCKHOLDER OF 100 SHARES. HE PAID 50,000 OF THE VALUE OF HIS SHARES. HE DID NOT YET PAY THE REMAINDER OF 50,000 AND THE CORPORATION CALLS FOR THE PAYMENT OF UNPAID SUBSCRIPTIONS. HE DID NOT PAY ON THE DATE SPECIFIED. HIS SHARES WERE DECLARED DELINQUENT AND SUBJECTED TO DELINQUENCY SALE WHERE THE CORPORATION MAY BID. THE CORPORATION PRECISELY MADE A CALL FOR THE PAYMENT OF THE UNPAID SUBSCRIPTIONS OF THE STOCKHOLDERS BECAUSE IT HAS BEEN INCURRING LOSSES. MAY THE CORPORATION BID FOR ITS SHARES? 2/3 of the Members in case of Non-Stock Corporation No. One of the essential requisites is that it must have Unrestricted Retained Earnings. The Supreme Court held that Stockholders’ approval is not required if it is necessary to aid in carrying out its primary purpose. The test is whether or not a logical relation exists between the act done and the corporate purpose in a substantial and not in a remote fancible sense. If there is, then the corporation may engage in such an activity even without stockholders’ approval. Q. CORPORATION EARNED 500,000 PROFITS. IT HAS DEBTS TO PAY 250,000. THE CORPORATION DECIDED TO MAKE USE OF THE REMAINING 250,000 AS RESERVES FOR POSSIBLE CONTINGENCIES. WHAT HAPPENS? The entire 500,000 is now restricted. The corporation cannot reacquire its own shares because it must come from unrestricted retained earnings. The corporation has no surplus profits in this case. POWER TO INVEST FUNDS IN ANOTHER CORPORATION. Section 42. Power to invest corporate funds in another corporation or business or for any other purpose. – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case of nonstock corporations, at a stockholder’s or member’s meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary. (17 1/2a) It may do so with the concurrence or vote of at least 2/3 of the Outstanding Capital Stock or The approval or consent of the stockholders will not be required for its validity if it is necessary to accomplish the primary purpose of its organization. In the case of Dela Rama v. Mao Sugar, Mao Sugar was engaged in the production of sugar and it invested its funds in Philippine Fibers engaged in the manufacture of sugar bags. One of the stockholders questioned the Board Resolution investing the corporate funds in the manufacture of sugar bags because it did not secure the approval of the stockholders. Q. WHAT IF THE CORPORATION INVEST ITS FUNDS TO CARRY OUT ITS SECONDARY PURPOSE? WILL STOCKHOLDERS’ APPROVAL BE REQUIRED? EXAMPLE: CORPORATION IS ENGAGED IN REALTY BUSINESS. ITS SECONDARY PURPOSE IS CONSTRUCTION OF ANY OR ALL TYPES OF BUILDINGS, TENEMENTS, ETC. THE BOARD DECIDES TO INVEST ITS FUNDS IN THE CONSTRUCTION BUSINESS. WILL STOCKHOLDERS’ APPROVAL BE REQUIRED FOR ITS VALIDITY? Yes. Investment of corporate funds in any other business or purpose other than the primary purpose requires the intervention of the stockholders. Thus, stockholders’ approval would still be required if it is to carry out any of the secondary purpose or purposes indicated in the Articles of Incorporation. POWER TO DECLARE DIVIDENDS Section 43. Power to declare dividends. - The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 35 AUSL/CORPORATION LAW REVIEWER/AJP-SFO capital stock at a regular or special meeting duly called for the purpose. (16a) Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (n) Of course, this power is granted only to stock corporations because non-stock corporations cannot allot their surplus profits by way of dividends. So this power to declare dividends is available only to stock corporations. The requirement is that it must have unrestricted retained earnings. The corporation cannot thus, declare dividends if it will use its capital or stated capital. The Board of Directors determine the nature of the dividends to be declared whether they be in cash, property or stock. But if the Board decides to declare or pay stock dividends the approval of at least 2/3 of the Outstanding Capital Stock will be required for its validity. Stock dividends, if they are to be declared, require the consent of the stockholders. Q. WHAT ARE STOCK DIVIDENDS? Those that are to be paid in the form of the shares of stocks of the declarant corporation. Example: X Corporation declares stock dividends to be paid out of its unissued stocks.) Q. A COMPANY ACQUIRED SHARES OF STOCKS OF SAN MIGUEL CORPORATION. THEY BOUGHT 100,000 SHARES OF SAN MIGUEL CORPORATION (SMC) WAY BACK (5) YEARS AGO. A IS NOW ALREADY A STOCKHOLDER OF SMC FOR 100,000 SHARES. IN THE COURSE OF TIME, SMC DECLARED STOCK DIVIDENDS IN FAVOR OF A, BEING ONE OF THEIR STOCKHOLDERS AND A RECEIVED ADDITIONAL 100,000 SHARES OF STOCKS OF SMC. A NOW HAS 200,000 SHARES. IF A CORPORATION WOULD WANT TO DECLARE THESE 100,000 SHARES AS DIVIDENDS TO ITS OWN STOCKHOLDERS, WILL STOCKHOLDERS’ APPROVAL BE REQUIRED FOR ITS VALIDITY? No. These are not stock dividends, these are Property dividends. It is not their shares that were declared. It should have come from the Declarant Corporation because property dividends are those that are paid by way of property where there is surplus in that form like bonds, notes, evidences of indebtedness or shares of stocks. Just like in this situation, there was a surplus, so they can declare that as property dividends. Again, that is not Stock Dividends, therefore, stockholders’ approval will not be required for its validity. Q. ARE SUBSCRIBERS TO SHARES OF STOCKS NOT FULLY PAID ENTITLED TO THE FULL PAYMENT OF THE DIVIDENDS DUE THEM? A SUBSCRIBED 100,000 SHARES BUT HE STILL DID NOT PAY A SINGLE CENTAVO. THE CORPORATION DECLARES P1.00 FOR EVERY 1 SHARE HELD BY STOCKHOLDERS. HOWEVER, HE STILL HASN’T PAID EVEN A SINGLE CENTAVO TO HIS SUBSCRIPTIONS. IS HE ENTITLED TO P100,000.00? Yes. Unless, he has been declared Delinquent, subscribers to shares of stock not fully paid shall have all the rights of a stockholder, as provided for in Section 72. Section 43 speaks of the facts that if they are Delinquent shareholders, they shall be entitled nonetheless to dividends provided that it is by way of cash dividends, but it shall first be applied to the amount of his delinquency plus costs and expenses, if any, and the remainder be paid to him. If it is by way of stock dividends, it shall be withheld from him until he pays the amount of his delinquency. The amount or number of stocks that would be paid to the stockholders as their shares of the dividends will be based on their proportionate interest in the corporation. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 36 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. HOW DO YOU VALUE STOCK DIVIDENDS? IS IT THE FAIR MARKET VALUE AT THE TIME OF ITS DECLARATION OR THE ACTUAL VALUE OF THE ORIGINAL ISSUANCE? Q. MAY THE STOCKHOLDERS COMPEL THE BOARD OF DIRECTORS TO DECLARE DIVIDENDS? In PLDT vs. National Telecommunications Company, the Supreme Court held that it cannot be said that there is no consideration, because there must be a consideration for the issuance of shares of stocks, otherwise, there would be watered stocks involved in the issuance of stock dividends. Corporations are prohibited under sec. 43, 2nd paragraph. From retaining surplus profits or Unrestricted Retained Earnings in excess of 100% of their paid-up capital. Dividends, regardless of the form they are declared, whether they be cash, property or stock, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Q. THE CORPORATION HAS PAID UP CAPITAL IS 1M AND THEY EARNED SURPLUS PROFITS OF 2M. MAY IT BE COMPELLED TO DECLARE DIVIDENDS? Thus, the value in the declaration in case of Stock dividends is the actual value of the original issuance of the said stocks. In case of Stock Dividends, it is akin to a forced purchase of stocks. In case of stock dividends, it is the amount that the corporation transfers from its surplus profits account to its capital account. This is why the declaration of dividends is also called as Capitalization of unrestricted retained earnings, in the sense that nothing will be lost in the net assets of the corporation. Example: Corporation has 1M ACS. It made 1M unrestricted retained earnings. 2M total assets. The corporation decides to declare this 1M as stock dividends. This may now form part of the capital stock of the corporation. Capitalization of Unrestricted retained earnings, the amount P1M did not leave the coffers of the corporation. It remained as part and parcel of the assets of the corporation. What was issued to the stockholders will only be a piece of paper the Stock certificate. The declaration of the dividends may or may not effect a decrease in the Total Assets of a corporation. Even before they declared the 1M dividends, it was already an asset of the corporation because it is the corporation who earned it. It forms part of the capital. There is no corresponding decrease in the assets of the corporation if it is by way of Stock dividends. However, if it is by way of cash or property dividends, the 1M was declared as cash dividends, then the 1M will disappear. There is a corresponding decrease in the total assets of the Corporation. We have to qualify. NB: That the basis is paid-up capital not the subscribed or authorized capital GR: Yes. At least to the same extent of more than 100% of 1M. They may be forced to declare 1m as dividends either by way of property, cash or any combination of them. XPN: 1. Where there is a definitive expansion program approved by the Board; 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without securing his/its consent and such consent has not yet been secured; 3. When it is clearly shown that such retention is necessary under special circumstances as when there is a need for special reserves for possible contingencies; Q. WHAT IF IT IS NOT IN EXCESS OF 100% OF THE PAID UP CAPITAL? MAY THE BOARD BE COMPELLED TO PAY OR DECLARE DIVIDENDS? GR: No XPN: Preferred shares. Preferred shares may be granted the right or the preference to be paid their dividends particularly if it is in the Mandatory-If-Earned type of preferred shares, those that are mandated to be paid dividends every year that profits are earned. So if there is that type of share, then he can compel the corporation that he be paid his dividends due to contractual obligations. POWER TO ENTER INTO MANAGEMENT CONTRACT Section 44. Power to enter into management contract. – No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 37 AUSL/CORPORATION LAW REVIEWER/AJP-SFO corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. ULTRA VIRES ACTS The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (n) (1) Allowing a collateral attack on the part of the contracting parties either on the corporation itself, or the 3rd party dealing with it; and It is now an express power conferred to all corporations registered under the provisions of the Code. (3) In the legitimate business. The corporation may enter into a management contract by: Any activity or transaction which is merely incidental or auxiliary to the main business of the corporation may be rightfully undertaken. (1) Majority vote of the members of the Board of Directors (2) Subject to the vote of the stockholders owning or representing a majority of the Outstanding Capital Stock. Higher voting percentage is required, 2/3 of the Outstanding Capital Stock is required: (1) When a stockholder or stockholders representing the same interest of the managing and managed corporation owns or controls more than 1/3 of the total outstanding stocks entitled to vote, of the managing corporation; (2) when a majority of the Board of Directors of the managing corporation also constitutes a majority of the members of the Board of the managed corporation Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (n) Those that cannot be performed or executed by a corporation because they are not within the express, inherent or implied powers, as defined by its Charter or Articles of Incorporation) A corporation can only do such acts and things as the law allows it to do; inclusive of the purpose or purposes for which it is formed or organized. If it acts beyond such powers and authority, the act performed is “Ultra Vires” act: (2) Avoid liability therefrom. XPN: (1) Clearly beneficial to the company; (2) Necessary to promote the interest/welfare of the corporation or even its employees; or furtherance of its There must be a Logical Relation between the act done and the corporate purpose or purposes, in order that the corporation may undertake the same. If there is, then it is within the implied powers of the corporation and thus, not ultra vires. (Montelibano v. Bacolod Mortia Milling) In the case of Carlos vs. Mindoro Sugar, this case involves the PhilTrust. PhilTrust, as the name implies, is engaged in the buying, selling and disposition of bonds, notes, evidences of indebtedness and other forms of securities. PhilTrust guaranteed the payment of these bonds. Later on, however, PhilTrust did not want to comply with the guarantees claiming that it was an ultra vires act. The Supreme Court held that it is not Ultra Vires for PhilTrust to guarantee payment because it would make the bonds, notes, evidences of indebtedness more readily marketable. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 38 AUSL/CORPORATION LAW REVIEWER/AJP-SFO It is in furtherance of the purpose of its business of acquiring, selling or disposing the bonds, notes or evidences of indebtedness. Even if they may be Ultra Vires, if it is not illegal per se, they may become binding and enforceable either by: 1.) Ratification, express or implied; incorporation, a private provide in its by-laws for: corporation may 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 2.) Estoppel. 3. The required quorum in meetings of stockholders or members and the manner of voting therein; BY LAWS Section 46. Adoption of by-laws. – Every corporation formed under this Code must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such bylaws or amendments are in accordance with law. (20a) Section 47. Contents of by-laws. – Subject to the provisions of the Constitution, this Code, other special laws, and the articles of 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) Section 48. Amendments to by-laws. – The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 39 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Commission the same to be attached to the original articles of incorporation and original by-laws. in pari materia and should therefore be read, interpreted, construed and harmonized with one another. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a) P.D 902-A is categorical and specific: it is merely a GROUND for suspension/revocation of corporate franchise. Meaning, there must be Notice and Hearing. (Loyola Grand Villas Homeowners Association v. CA) All corporations registered under the general provisions of this Code must adopt and file its by-laws with the SEC, within a period of (1) month from the date of its registration, if not filed simultaneously with the Articles of Incorporation. The by-laws will become valid and effective only: However, the By-Laws may be adopted and filed prior to incorporation or after incorporation. If it is prior to the incorporation, the SEC, as a matter of policy, will require their simultaneous filing with the Articles of Incorporation; The law uses the word ‘must’ adopt and file a by-law. Q. WHAT COULD BE THE EFFECT OF THE NON-FILING OF THE BY-LAW OR THE NONADOPTION OF THE CORPORATE BY-LAWS WITHIN THE PERIOD SPECIFIED BY LAW, WITHIN 30 DAYS FROM DATE OF ITS INCORPORATION? WILL IT RESULT TO THE AUTOMATIC DISSOLUTION OF THE CORPORATION? No. The word ‘must’ is not always imperative. The tendency is to interpret the word as a reasonable construction of the statute in which it is used will demand or require. The deliberations of the legislature would show that it was not the intention to make it imperative. Taken as a whole and under the principle that “the best interpreter is the statute itself”, Section 46 reveals the intent of the legislature to attach a directory and not a mandatory meaning to the word “must”. Although the Corporation Code requires the filing of the by-laws within the period of 1 month, it does not expressly provide for the consequences of its non-filing. However, the consequences of non-filing have been rectified by P.D 902-A which granted the SEC then the power to: Upon the approval of the SEC to the effect that it is not contrary to law. The SEC must go through the provisions of the by-laws and ensure that they are not contrary to law. REQUISITES OF A VALID BY-LAWS 1. It must not be contrary to Law, Morals, Public Order or Public Policy. There was a by-law provision which granted the directors compensation even after they have served their term of office. This is contrary to law. Any provision in the by-law that runs counter to the provisions of the Corporation Code is deemed as if it is not written at all. (Barretto v. La Previsoria) Election of directors who are not members of the Corporation. This is also not valid. It is contrary to law. (Grace Christian High School v. CA) 2. It must not be inconsistent with the Articles of Incorporation. Example: Q. ARTICLES OF INCORPORATION STATES THAT THERE SHALL BE SEVEN MEMBERS OF THE BOARD BUT IN THE BY-LAWS, IT WAS STATED THAT THERE SHALL BE NINE MEMBERS OF THE BOARD. IN CASE OF CONFLICT, WHICH SHOULD PREVAIL? That written in the Articles of Incorporation should prevail because the Articles of Incorporation is a 3-fold contract. The by-laws are mere rules of governance of the corporation. Suspend or revoke after proper notice and hearing, among others, the certificate of registration of a corporation for its failure to file the by-laws within the required period. THREE FOLD CONTRACT a) Between and among the stockholder, members, directors and officers; Failure to file and adopt by-laws would thus, not result to the automatic dissolution of the corporation. In this particular case, the Corporation Code and P.D 902-A are statutes b) Between them or any of them and the corporation; AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 40 AUSL/CORPORATION LAW REVIEWER/AJP-SFO c) The corporation and the State, insofar as its right to exist as such corporation is concerned. . 3. It must be general and uniform in its effect and applicable to all alike or similarly situated 4. It must not impair obligations contracts or vested rights. and 5. It must be reasonable. (Gokungwei v. SEC) By-laws are also subject to amendment by: (1) The majority vote of the directors. Subject to the approval or ratification of at least a majority of the stockholders owning or representing at least majority of the Outstanding Capital Stock (2) Amendment of the Articles of Incorporation requirement is 2/3 of the Outstanding Capital Stock; Amendment of the Article of Incorporation may take effect: (1) Upon the approval of the SEC In the case of By-Laws, it will never become valid and effective until and unless the SEC gives its stamp of approval, as provided for in Section 48. The by-laws and the Articles of Incorporation are (2) separate and distinct document. MEETINGS Section 49. Kinds of meetings. – Meetings of directors, trustees, stockholders, or members may be regular or special. (n) Two Types of meetings: 1. Board of Directors or Trustees’ Meeting 2. Stockholders’ Meeting Section 50. Regular and special meetings of stockholders or members. - Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. AUSL/CORPORATION LAW Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer. (24, 26) Whether they be Board of Directors or Trustees Meeting or Stockholders’ Meeting, there are two types: 1. Regular 2. Special REQUISITES FOR A VALID MEETING 1. Insofar as stockholders’ or members’ meetings are concerned, under Section 50, it must be held on the date fixed in the ByLaws or in accordance with law; If there is no date fixed in the by-laws it shall be on any date of April as may be determined by the Board of Directors. 2. Prior Notice must be given; In stockholders’ meetings, the requirement is that, notice must be sent two weeks before the annual or regular meeting; If it is a special meeting one week before the meeting; NB: The two weeks or one week requirement of sending out notices may be shortened or extended validly by a provision in the Articles of Incorporation or By-laws; In the case of Directors v. Tan, the by-laws of the corporation required that notices shall be sent at least five days, which is less than 1 week prior to the meeting. The notices were posted only two days before the scheduled meeting. One of the stockholders questioned the validity of the resolutions passed in that meeting which was actually election of the board of directors. The Supreme Court ruled that the meeting is invalid. The manner and mode of sending out notices must be complied with. REVIEWER/AJP-SFO P a g e | 41 AUSL/CORPORATION LAW REVIEWER/AJP-SFO 3. It must be held at the Proper Place Section 51. Place and time of meetings of stockholders of members. – Stockholder’s or member’s meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (24 and 25) It must be held in the city or municipality where the principal office is located or established and as far as practicable, at the principal office of the corporation Section 93. Place of meetings. – The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. Section 93 empowers a Non-Stock Corporation to validly provide in their by-laws that the Members’ Meetings may be held anywhere within the Philippines; Provided, that proper notice is sent to all members There is no such grant or authority granted empowering a Stock Corporation to validly provide in their Articles or by-laws that stockholders meetings may be held anywhere within the Philippines. If there is no provision in the by-laws of the Non-Stock Corporation empowering to call meetings even beyond the territorial boundaries of the city or municipality where it has its Principal Office, the rule regarding Stock Corporations will be applicable, as provided for in Section 87. It merely empowers the Non-Stock Corporation the power and authority to validly provide in the by-laws that meetings of members may be held ANYWHERE in the Philippines. If the principal office is located anywhere in Metro Manila, they can also hold their meetings anywhere within Metro Manila. Q. SAN MIGUEL CORPORATION HAS ITS PRINCIPAL OFFICE IN MANDALUYONG CITY BUT THEY ARE HOLDING THEIR MEETINGS AT THE PICC GROUNDS, PASAY CITY. IS IT VALID? Yes. Because Metro Manila is considered as one single city or municipality. The same holds true in cases of Non-Stock Corporations. 4. It must be called by the proper person or officer. Section 54. Who shall preside at meetings. – The president shall preside at all meetings of the directors or trustee as well as of the stockholders or members, unless the by-laws provide otherwise. (n) Meetings are to be called by the President or the Secretary, on orders of the President, unless the By-laws provide for a different person. Q. IF THERE IS A PERSON AUTHORIZED TO CALL THE MEETING, BUT HE FAILS, REFUSES OR NEGLECTS TO DO SO, MAY THE STOCKHOLDERS PETITION THE PROPER FORUM FOR AN AUTHORITY TO CALL THE SAME? EXAMPLE: THE PRESIDENT IS THE ONE AUTHORIZED TO CALL THE MEETING. HE IS THERE AT THE PRINCIPAL OFFICE OF THE CORPORATION EVERYDAY. THE STOCKHOLDERS WANTED TO CALL A MEETING BECAUSE THEY FOUND OUT THAT THE FINANCIAL STATEMENTS THAT WERE PRESENTED TO THEM IN THE LAST STOCKHOLDERS’ MEETING 2 WEEKS AGO CONTAIN DATA REGARDING MISUSE AND MISAPPLICATION OF CORPORATE FUNDS. SO, THEY WANTED TO CLARIFY THE SAME WITH ALL OTHER STOCKHOLDERS SIMILARLY SITUATED. BUT THE PRESIDENT REFUSE TO CALL THE MEETING BECAUSE HE KNOWS THAT HE WILL BE FOUND OUT AS THE ONE BEHIND THE MISUSE AND MISAPPLICATION OF THE CORPORATE FUNDS. WHAT IS THE APPROPRIATE REMEDY? MAY THE STOCKHOLDERS PETITION THE PROPER FORUM FOR AN AUTHORITY TO CALL THE MEETING? Yes. It must be by way of Mandamus. The clear intent of the legislature when they deleted the phrase “if the officer fails or refuses to call the same” is a stockholder can no longer be authorized by the court to call the meeting and preside thereat. (Afable v. SEC) Metro Manila is considered as one single city or municipality AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 42 AUSL/CORPORATION LAW REVIEWER/AJP-SFO NB: Five Essential requisites for a valid Meeting 5. The quorum and voting requirements must be complied with. Section 52. Quorum in meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations. GR: The stockholders owning or representing at least a majority of the Outstanding Capital Stock would constitute a quorum; XPN: If the voting requirement would be more than a majority necessarily, the quorum requirement must also be at least equal to the voting requirement imposed by the law The VOTING requirement would VARY. 2/3 in some instances and majority in other instances. Q. DO YOU INCLUDE NON-VOTING SHARES IN ARRIVING AT THE VOTING REQUIREMENT IMPOSED BY THE LAW? Section 6 provides that non-voting shares are not included in determining the voting requirement imposed by the Code, unless: They are nonetheless entitled to vote under the penultimate paragraph of Section 6 If they fall under any of the enumeration provided in Section 6, then they are included in the determination of the voting requirement imposed by the law. Q. MANAGEMENT CONTRACT. IF THERE ARE 1M SHARES, 200,000 ARE NONVOTING, WHAT IS MAJORITY VOTE? It shall be based on the 800,000 only, because you exclude the non-voting shares. They are not entitled to vote. Q. AMENDMENT OF THE OUTSTANDING STOCKS; VOTING; WHAT WOULD BE YOUR 2/3? WILL IT BE 2/3 2/3 OF 1M? ARTICLES, 1M 200,000 NONTHE BASIS OF OF 800,000 OR 2/3 of 1M, because even if they are non-voting shares, Section 6 states that they are nonetheless entitled to vote in cases of amendments of the Articles of Incorporation. 1. It must be held on the date fixed in the bylaws or in accordance with law; 2. Prior notice must be given; 3. It must be held at the proper venue; 4. It must be called person/officer; and by the proper 5. The quorum and voting requirements must be complied with. Q. A MEETING WAS HELD ON JUNE 10. THE BY-LAWS PROVIDE THAT THE ANNUAL MEETING OF THE STOCKHOLDERS SHALL BE ON THE LAST SUNDAY OF MAY. NOTICE REQUIREMENT WAS DONE 5 DAYS BEFORE THE MEETING. PLACE OF PRINCIPAL OFFICE IS IN QUEZON CITY BUT THE MEETING WILL BE HELD IN BAGUIO CITY. VICE-PRESIDENT CALLED THE MEETING. WHAT WOULD BE THE RESULT OF THE MEETING IMPROPERLY HELD OR CALLED? WHAT WOULD BE THE STATUS OF ANY RESOLUTION PASSED BY THE STOCKHOLDERS AT A MEETING IRREGULARLY OR ILLEGALLY HELD AND/OR CONDUCTED? WILL THEY HAVE ANY BINDING FORCE OR EFFECT? GR: Not Valid XPN: It may have a valid force and effect. Section 51, 2nd paragraph provides that any meeting improperly held or called shall nonetheless be valid if all the stockholders or members are present or duly represented. DIRECTORS’ OR TRUSTEES’ MEETINGS Directors normally would refer to the governing board of a Stock Corporation. In Non-Stock corporations they are normally called the Board of Trustees. However, Non-Stock Corporations and other special corporations may their governing Board by any other name. Section 138. Designation of governing boards. – The provisions of specific provisions of this Code to the contrary notwithstanding, nonstock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. (n) There’s nothing likewise that bar or prevent Non-Stock corporations from using the term ‘directors’ to designate their governing board. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 43 AUSL/CORPORATION LAW REVIEWER/AJP-SFO TWO TYPES OF DIRECTORS MEETINGS 1. Regular - those that are held monthly or as may be provided for in the by-laws; 2. Special - at any time upon call of the President as provided for in the by-laws; VENUE OF MEETINGS OF DIRECTORS Section 53. Regular and special meetings of directors or trustees. – Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Q. SHOULD THEY BE PHYSICALLY PRESENT DURING DISCUSSIONS OF MATTERS THAT IS BROUGHT BEFORE THEM? No. Because of the E-Commerce Law, Directors can meet via teleconference or video conference. Q. MAY THE DIRECTORS DURING DIRECTORS’ MEETING VOTE BY PROXY? No. Sec. 25 is very clear and specific, Directors cannot vote by proxy in directors’ meetings. Q. THE AGENDA IN THE STOCKHOLDERS’ MEETING IS ELECTION OF DIRECTORS. MR. A IS A DIRECTOR AND HE CANNOT ATTEND THE SAID MEETING SO HE SENT A PROXY. CAN HE VOTE BY PROXY? Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly. Yes, because it is a stockholders’ meeting. What Sec. 25 is saying is that they cannot vote by proxy in Directors’ meetings. GR: Anywhere within or without the Philippines GR: They are without any force and effect. XPN: Unless otherwise provided for in the bylaws XPN: They may be ratified impliedly, or even by estoppel. QUORUM AND VOTING REQUIREMENT IN DIRECTORS’ MEETINGS Express, if there is a subsequent formal meeting of the board ratifying the act or contract. Majority of their number as fixed in the articles of incorporation would constitute a Quorum. Majority of those present at which there is a quorum would constitute Voting Requirement Q. MAY THE VOTE OF 3 MEMBERS OF A 7MAN GOVERNING BOARD PASS A VALID CORPORATE ACT OR TRANSACTION? GR: Yes. Because the voting requirement is majority of those present at which there is a quorum. XPN: (1) Election of corporate officers because the law requires a majority vote of the entire number of the board. (2) Unless the Articles of Incorporation or ByLaws provide for a higher quorum or voting requirement. Directors are elected because of their business acumen or their expertise in the day-to-day management of the corporate affairs. So if they are acting as ordinary stockholders, then they can vote by proxy. Q. WHAT IS THE EFFECT OF DIRECTORS’ MEETING IF IT IS IMPROPERLY HELD OR CALLED? expressly or Implied, from the actuations of the responsible corporate officers/directors In the case of Lopez Realty v. Fontecha, one of the directors was not notified of the meeting for the purpose of granting certain benefits to the employees, gratuity pay to the employees. A resolution was passed granting the same. The particular director concerned was not notified because he was abroad. He said that the resolution is without force and effect on the ground of lack of notice. The Supreme Court, however, found out that the objecting director knew of the resolutions passed and in fact, she was the very person who signed the first 2 vouchers to pay the gratuity pay arising out of the questioned resolution. Therefore, she is estopped. STOCKS AND STOCKHOLDERS A person can be a stockholder, whether natural or juridical, only in 3 ways: 1. By a contract of subscription; AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 44 AUSL/CORPORATION LAW REVIEWER/AJP-SFO 2. By acquisition or purchase of shares from existing stockholders; cannot compel the acquiring stockholder to pay the unpaid portion thereof. 3. By purchase or acquisition of treasury shares. Q. A CORPORATION IS ENGAGED IN THE MANUFACTURING. THERE IS UNISSUED STOCK IN THE CORPORATION, 750,000 UNISSUED STOCKS. A PERSON WANTS TO ACQUIRE 100,000 OF THE 750,000 UNISSUED STOCKS. THE AGREEMENT STIPULATES THAT, “HE WILL NOT BECOME A STOCKHOLDER UNTIL AND UNLESS HE PAYS THE FULL AMOUNT OF THE ACQUISITION COST”. HE ONLY PAID 50%. THE CORPORATION WAS DESTROYED BY FIRE INCLUDING ALL ITS PROPERTIES TURNING EVERYTHING INTO ASHES. MAY THE CORPORATION COMPEL THE ACQUIRING STOCKHOLDER TO PAY THE BALANCE OF ITS ACQUISITION COST DESPITE THE FACT THAT HE WILL NOT BE CONSIDERED AS ITS STOCKHOLDER UNTIL HE PAYS ITS ACQUISITION COST IN FULL? Section 60. Subscription contract. – Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract. (n) Subscription refers to: A contract for the acquisition of shares of stocks of an existing corporation or a corporation still to be formed and the agreement to pay the same. Any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed, is deemed a Subscription Contract, no matter how the parties will refer to it. Example: Q. 1M ACS; 250,000 SUBSCRIBED CAPITAL; THERE’S A FREE PORTION OF 750,000 STOCKS, THEY ARE UNISSUED STOCKS OF THE CORPORATION. IF A PERSON WILL WANT TO ACQUIRE A PART AND PARCEL OF THAT FREE PORTION OF THE UNISSUED STOCKS, MAY HE BUY OR PURCHASE IT? Yes. If that is his intention, the law says—that is a subscription contract, no matter how it may be referred to. There’s no longer such thing as becoming a stockholder by purchase of unissued stocks of a corporation. As long as it came from the unissued stock of a corporation that is a subscription. The unambiguous interpretation is that the person acquiring the unissued stock of a corporation immediately becomes a stockholder from the effectivity of the contract and acquires all the rights and the corresponding liability to pay the full value of the shares. The unpaid portion of the subscription will become a debt owing to the corporation and just like any other indebtedness, he is bound to pay the same. Unlike in the case of a sale or purchase: Under the Civil Law, the obligation of the parties would be reciprocal and dependent on one another. Under the Civil Code, he should not be liable to pay because there is no consideration. The certificate of stock that will be issued by the corporation is a mere scrap of paper. It is valueless. But under Section 60 of the Corporation Code No matter how the parties refer to it, a Subscription Contract. The acquiring stockholder is much bound to pay the debt owing to the corporation. Unpaid subscriptions will be a debt owing to the corporation. NB: There is no distinction between purchase or sale and/or subscription insofar as unissued stocks of the corporation is concerned. Section 62. Consideration for stocks. – Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and If the corporation is unable or no longer in a position to issue a valid stock certificate, you AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 45 AUSL/CORPORATION LAW REVIEWER/AJP-SFO 6. Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose. (5 and 16) Shares of stocks cannot be issued for a consideration less than its par or issued value. If they are issued below the par/issued value, they are considered as “watered stocks”. Watered stock are shares of stocks issued by the corporation as fully paid up when in fact, the full value thereof has not been paid or promised to be paid. Example: Par value of the shares is P1.00 per share. The corporation CANNOT issue it for only P0.80 per share, otherwise, it will be considered as watered stock. Q. THE PAR VALUE OF THE SHARES is P1.00 PER SHARE; BUT THE FAIR MARKET VALUE IN THE COURSE OF ITS OPERATION IS ALREADY P12.00 PER SHARE. MAY IT BE ISSUED FOR A CONSIDERATION OF P10.00 WITHOUT VIOLATING THE RULE AGAINST WATERED STOCKS? Yes, it may be issued. For the purpose of determining whether or not there is stock watering, it is the par value, not the fair market value. Q. WHAT IS THE EXTENT OF THE LIABILITY OF DIRECTORS AND THE STOCKHOLDER HOLDING THE WATERED STOCK? Those voting or consenting to the issuance of watered stock or those having knowledge thereof but do not interpose their written objections with the corporate secretary are Solidarily Liable with the stockholder to the corporation and its stockholders and its creditors for the difference between the par value/issued value and the amount for which they were actually issued. Even passive directors or officers may be held Solidarily Liable with the stockholder concerned if they have knowledge of the issuance of the watered stock but did not interpose their written objections with the corporate secretary. Q. 10M AUTHORIZED CAPITAL STOCK, DIVIDED INTO 1M PER COMMON SHARES WITH A PAR VALUE OF P1.00 PER SHARE AND 9M = NO PAR VALUE SHARES; AMOUNT SUBSCRIBED IS 500,000 SHARES WITH PAR VALUE, 4M SHARES NO PAR VALUE SHARES; A WANTS TO ACQUIRE THE REMAINING 500,000 OF THE PAR VALUE SHARES AND THE CORPORATION ISSUES IT IN FAVOR OF A FOR ONLY P0.80. THERE’S A DIFFERENCE OF P0.20. P0.20 X 500,000 IS P100,000, IT IS THE WATER IN THE 500,000 SHARES INVOLVED. THE NO PAR VALUE SHARES OF 4M HAS BEEN DULY SUBSCRIBED. A ALSO WANTS TO ACQUIRE 1M NO PAR SHARES. UNDER THE RULES IN CORPORATION LAW, THE NO PAR VALUE SHARES SHOULD NOT BE ISSUED AT LESS THAN P5.00 PER SHARE AND FOR PURPOSES OF DETERMINING HOW MUCH SHOULD BE THE ISSUE PRICE OF A NO PAR VALUE SHARE, IT IS DETERMINED BY THE PROVISION IN THE ARTICLES OF INCORPORATION. THE ARTICLES OF INCORPORATION MAY PROVIDE THAT IT SHALL BE DETERMINED BY THE BOARD OF DIRECTORS. ASSUME THAT THE BOARD OF DIRECTORS DECIDED THAT THE ISSUE PRICE OF THE NO PAR VALUE SHARES SHALL BE P10.00 PER SHARE. A, IN ACQUIRING 1M NO PAR VALUE SHARES, HE ACQUIRES IT FOR ONLY P9.00 PER SHARE, A DIFFERENCE OF P1.00. THERE’S ALSO STOCK WATERING TO THE EXTENT OF P1.00 PER SHARE AND THEREFORE, 1M IS THE “WATER” IN THE 1M NO PAR VALUE SHARE. IS A LIABLE TO PAY THE DIFFERENCE? 1st scenario, Yes, A is liable solidarily with the directors and officers concerned to pay the difference between the P1.00 and P0.80. 2nd scenario, No. A is not liable. Under Section 6, No par value shares, once issued, are AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 46 AUSL/CORPORATION LAW REVIEWER/AJP-SFO deemed fully paid and non-assessable. The directors are the only ones who are liable. The consideration for the issuance of shares of stocks may either be any combination of the following: 1. Actual cash paid 2. Property, Tangible or Intangible, actually received by the corporation 3. Labor or Services actually rendered 4. Previously incurred indebtedness 5. Stock Dividends, amounts transferred from unrestricted retained earnings to stated capital. 6. Outstanding stocks exchanged for stocks in the event of reclassification or of conversion. Certificates of stocks cannot be issued until: authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Stock certificates may be transferred by the Delivery of the stock certificate Duly Endorsed by the owner or his attorney-in-fact. No transfer, however, shall be valid except as between the parties, until the transfer is recorded in the books of the corporation. No shares of stocks against which the corporation holds any unpaid claims shall be transferrable in the books of the corporation. The full amount of the subscription together with the interest and expenses has been paid. This word Unpaid Claims means, unpaid portion of the subscription of the particular stockholder concerned. No certificate can thus be issued to a subscriber of shares of stocks to cover what he may have already correspondingly paid for. It does not include any other kind of indebtedness which the shareholder may have that is due to the corporation. Q. HE SUBSCRIBED TO 1M SHARES. HE ALREADY HAS PAID FOR 500,000, P1.00 PER SHARE, OUT OF HIS SUBSCRIPTION OF 1M. MAY THE SUBSCRIBER BE ISSUED A CERTIFICATE OF STOCK CONSISTING OF 500,000 SHARES? Example: No. Stock Indivisible. subscriptions are now deemed He has not paid any single share of stock. He has paid P0.50 for each share that he has subscribed. This is applied pro rata to his entire subscription. He cannot be issued a stock certificate. He is not the owner of a particular number of shares which may have been sufficient to cover his payments because they are applied to the total number of shares subscribed. STOCK CERTIFICATES Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally The shareholder has already paid his shares in full and he no longer has any other debts. If he transfers his shares, it must be recorded in the books of the corporation, of course, to be Valid and Binding against other 3rd parties. In the case of Citibank vs. CA, a Stockholder incurred a debt to the corporation. He has already paid his unpaid shares. He is now fully-paid. He wanted to transfer it but the corporation does not want to. The Supreme Court held that he should transfer it because there are no unpaid claims in the shares he subscribed and fully paid. GR: The mode and manner of transferring shares as provided for by law must be complied with. Endorsement alone, without delivery, of the certificate of stock is not sufficient to effect a valid transfer. (Embassy farms vs. CA) On the other hand, delivery alone (without endorsement is not also a valid transfer of shares of stocks. (Razon v. IAC) NB: Section transferred. 63 uses AUSL/CORPORATION LAW REVIEWER/AJP-SFO the word may P a g e | 47 be AUSL/CORPORATION LAW REVIEWER/AJP-SFO XPN: (1) It was ruled that a duly notarized deed is also an effective mode of transferring shares (Rural Bank v. Salinas) XPN to (1): Where a certificate of stock has already been issued by the corporation, a mere notarized deed will not be sufficient for a valid transfer of shares of stocks. It must also be coupled with the delivery of the endorsed stock certificate to the transferee. (Rural Bank of Lipa vs. CA) Rationale: It is necessary to avoid fraudulent and fictitious transfers. For what would prevent a scrupulous businessman or stockholder to transfer his shares by a notarized deed and then subsequently selling his shares by endorsing and delivering the same to the transferee? That would result to a Double Sale. While it may be transferred by endorsement coupled with the delivery of stock certificate, it cannot be by a mere notarized deed without the certificate being delivered and endorsed to the transferee, if the certificate of stock has already been issued by the corporation. Q. ARE CERTIFICATES OF NEGOTIABLE INSTRUMENTS? STOCK No. They are Non-Negotiable. While they may be transferred by the delivery of the endorsed stock certificate, they are merely quasi-negotiable therefore, they are nonnegotiable in the sense that the transferee takes it without prejudice to all the rights and defenses which the true or lawful owner may have as may be obtaining under a particular set of facts or circumstances, subject only to the rules governing estoppel. Q. A’S CERTIFICATE OF STOCK WAS STOLEN BY HIS BROTHER, B. B FORGED A’S ENDORSEMENT AND TRANSFERRED IT TO C, PURCHASER IN GOOD FAITH AND FOR VALUE. DOES C ACQUIRE A BETTER TITLE THAN A? No. Because A can always raise the defense that it was stolen from him and the endorsement was forged. It is subject to all the rights and defenses which the true or lawful owner may have. C, the stock certificate being non-negotiable, is not even a Holder in Due Course. (2) The transferor is in Estoppel. In the case of Tan v. SEC, the transferee is the brother of the transferor and the transferee already exercise his rights as a stockholder and was in fact elected as a member of the Board of Directors at a point in time when the transferor was still the President of the corporation. The transferor in this case was rightfully considered as in Estoppel. The Supreme Court held that Endorsement or Delivery is not essential, where the person sought to be considered as a stockholder is an officer of the corporation and has custody of the stock and transfer. SUMMARY: GR: The basic rule is Endorsement and Delivery of the stock certificate. XPN: (1) It may be effected by a mere notarized deed, if there is no stock certificate issued yet; (2) The transferor is considered as in Estoppel. XPN to the XPN: (1) If a stock certificate has already been issued, then it cannot be effected by a mere notarized deed. It must still be coupled with the Delivery of the Endorsed Stock Certificate Even if C will transfer it to another person, D also a transferee in good faith and for value, D will not likewise acquire title no matter how innocent they may be because it is subject to all the rights and defenses which the true and lawful owner may have. XPN: Unless the rules governing estoppel will apply. Q. B DID NOT STEAL A’S CERTIFICATE. A WAS RUNNING AWAY FROM A CASE FILED AGAINST HIM IN THE PHILIPPINES SO HE ENDORSED THE STOCK CERTIFICATE TO HIS BROTHER, B. B SOLD THE STOCK CERTIFICATE TO C, PURCHASER IN GOOD FAITH AND FOR VALUE. WILL C ACQUIRE TITLE? Yes. A has clothed B with apparent title and authority over the shares of stocks covered by the certificate of stock. Whoever is in possession is legally presumed to be the owner thereof. It was endorsed and delivered by the owner, A. He is now in estoppel. Under Section 63, there is a valid transfer. A has no defense available. GR: The Code requires likewise that these transfers of shares of stocks should be recorded in the stock and transfer book. It shall not be valid until the same has been duly registered in the books of the corporation. XPN: But insofar as the contracting parties themselves are concerned, a transfer of shares of stocks, even if it is not recorded in the books AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 48 AUSL/CORPORATION LAW REVIEWER/AJP-SFO of the corporation is valid and binding between them. Section 63 is categorical; no transfer shall be valid except as between the parties, until the transfer is recorded in the books of the corporation. It is valid between the contracting parties even if it is not recorded in the books of the corporation. It will not be, however, valid and binding against the corporation or any other 3rd party in interest until—they are registered in the books of the corporation. (Uson Case) If the corporation fails or refuses to register a valid transfer, Mandamus is the appropriate remedy. The right of an assignee or transferee to have the stock transferred in his name in the books of the corporation is an inherent right flowing from his ownership of shares of stocks. In the case of Tay v. CA, the supposed transferee is not yet a prima facie owner or holder of the share of stocks. n order that Mandamus may issue, the alleged transferee must have a Clear Legal Right to the thing demanded. It is the imperative duty on the part of the respondent to perform the act required. It neither confers nor imposes duties and is never issued in doubtful cases. In this case, the creditor sought to compel the corporation to record the transfer by virtue of the failure of the debtor to pay his debts pursuant to a contract of pledge. Debtor endorsed stock certificate to the creditor but he failed to pay. So, the creditor went to the corporation to have the transfer of shares recorded. Whenever the corporation refuses to register the transfer, Mandamus will lie to compel the officer to record the same in the stock and transfer book of the corporation. The Supreme Court held that you cannot do that. Mandamus will not issue. By virtue of the failure of that creditor to sell the shares at a public auction or private auction sale pursuant to the contract of pledge. Again, there is good cause. The duty of the corporation to record transfer of shares of stocks is ministerial, and if it is refused without good cause, it may be compelled to do so by Mandamus. Take note the provision in the Civil Code: The pledgor remains to be the owner until the pledgee sells the thing pledged at a public auction sale. Q. THE TRANSFER OF THE SHARES OF STOCKS IS VIOLATIVE OF THE NATIONALIZATION LAWS. MAY THE CORPORATION BE COMPELLED TO RECORD THE TRANSFER? In this case, the creditor is not yet the prima facie owner of the shares. Mandamus will not issue because there is good cause for the refusal on the part of the corporation to record the transfer. No. Because of the “no-transfer clause” in the Articles of Incorporation which would guarantee compliance with the statutory requirements particularly, the nationalization laws. The right to transfer shares is also an inherent right flowing from ownership of stocks. However, the right to transfer may be regulated or restricted reasonably, that is. No-transfer clause provides substantially that: No transfer of shares of stocks which will reduce the ownership of Filipino citizens to less than that allowed by law shall be recorded in the books of the corporation. Valid between the contracting parties; Not Valid against the corporation and other 3rd parties. Q. UNDER SEC. 63 ITSELF, THE CORPORATION HAS UNPAID CLAIMS OVER THE SHARES OF STOCKS TO BE RECORDED AS TRANSFERRED. THE SHARES WERE TRANSFERRED BUT NOT YET FULLY PAID. MAY THE CORPORATION BE COMPELLED TO TRANSFER IT? No. There is good cause. GR: Generally, it is not subject to restrictions or regulations. XPN: But may be regulated or reasonably restricted by the law itself or even by agreement of the parties (Lambert v. Fox) (1) For instance, in a case of a Close corporation, the law itself imposes a restriction Section 96 (1). Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 49 AUSL/CORPORATION LAW REVIEWER/AJP-SFO permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. subscription, then they are not bound to pay any interest. Section 96 provides that the Articles of Incorporation of a Close Corporation must provide that: the number of the stockholders shall not exceed 20 Specified persons. Section 67. Payment of balance of subscription. – Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. If a stockholder in a Close corporation transfers his shares to a person who is not one of those specified persons, the corporation will refuse. (2) (3) Shares transferred when the corporation has unpaid claims; the law itself imposes a prohibition that the corporation can refuse registration. There may also be restrictions imposed by Special Law. Example: Violation of nationalization Law, the corporation will not record the transfer. (4) Agreement of Parties In the case of Lambert v. Fox, the 2 major stockholders agreed not to sell their shares for a period of 1 year which is beneficial to both parties and the corporation itself. The other stockholder transferred his shares before the 1 year period. The Supreme Court held that the 1 year period is reasonable. It may be reasonably restricted by agreement of the parties. In this particular case, it is beneficial not only to the contracting parties but also to the corporation. GR: Subscribers to shares of stocks are not generally required to pay interest on their unpaid subscriptions. XPN: They may be required to pay interest if the by-laws or the contract of subscription requires the same. So if there’s no provision in the by-laws or the contract of subscription requiring payment of interest of the unpaid subscriptions of the stockholders, then he is not bound to pay any interest. If there is an interest, itt will be at the rate indicated in the contract or in the by-laws. If there is an interest but it fails to indicate the rate, then it shall be the Legal Rate of interest. If there is no specification that they are liable to pay interest in the by-laws or in the contract of AUSL/CORPORATION Two Remedies of the corporation to enforce payment of unpaid subscriptions to its capital stock: 1. By way of a Delinquency Sale 2. By a Direct Action in Court Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. Section 68. Delinquency sale. – The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a LAW REVIEWER/AJP-SFO P a g e | 50 AUSL/CORPORATION LAW REVIEWER/AJP-SFO share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. Section 69. When sale may be questioned. – No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. (47a) Section 70. Court action to recover unpaid subscription. – Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a) GR: Unpaid portion of subscriptions of the shareholders will never become due and demandable. XPN: (1) A call is made by the board of directors for the payment of the unpaid portion or any part thereof. (2) The contract stipulates the date or dates when they will respectively fall due. If a call is made specifying the date or dates when the shareholders or subscribers should pay their unpaid subscription and the stockholder concerned did not pay on the date specified, the shares will thereby become deliquent and will subject the shares to a delinquency sale. The shares will become subjected to an auction sale subject, of course, to: Notice and Publication, not earlier than 30 days but not more than 60 days from the date of delinquency. It will be sold to the bidder who tenders or offers to pay the full amount of the balance of the subscription or inclusive of interest and/or cost and expenses, if any, for the least number of shares. The winning bidder in this particular case is the bidder who tenders to pay the balance of the unpaid portion of the subscription of the stockholder Q. SO IF IT IS TO BE SOLD AT PUBLIC AUCTION, BUT THERE WERE NO BIDDERS WHO APPEARED DURING THE AUCTION SALE. MAY THE CORPORATION BID? Yes. Sec. 70 provides that, if there is no bidder, the corporation may bid subject to the provisions of this Code. Q. A SUBSCRIBED 100,000 SHARES VALUED AT P1M. HE PAID P500,000, SO HE HAS A BALANCE OF P500,000. THE CORPORATION IS IN DIRE NEED OF MONEY FOR THE OPERATION OF ITS BUSINESS SO THE BOARD OF DIRECTORS DECIDED TO MAKE A CALL FOR THE UNPAID PORTION OF THE SUBSCRIPTION OF A. THE CORPORATION HAS DEBTS AMOUNTING TO P10M AND IN ORDER TO RAISE FUNDS TO PAY THE INDEBTEDNESS, THEY MADE A CALL FOR THE UNPAID PORTION OF THE SUBSCRIPTION OF THE STOCKHOLDERS INCLUDING A. IT SPECIFIED THE DATE WHEN IT SHOULD BE PAID. A DID NOT PAY. A’S 100,000 SHARES ARE NOW DELINQUENT AND THE BOARD OF DIRECTORS CAN NOW SELL THESE SHARES AT A PUBLIC AUCTION SUBJECT TO PUBLICATION. THERE IS AN ADDITIONAL COST OF P5,000. SO YOU NOW HAVE P505,000. THERE ARE NO BIDDERS. NO BIDDER APPEARED. MAY THE CORPORATION BID? No, the corporation may bid subject to the provisions of this Code. This is acquisition of its own shares and as a rule, a corporation cannot generally reacquire its own shares if it has no Unrestricted Retained Earnings. The corporation cannot bid. It must have unrestricted retained earnings as a General Rule. Q. IF THE CORPORATION CANNOT BID BECAUSE IT HAS NO UNRESTRICTED RETAINED EARNINGS, IS THE CORPORATION NOW LEFT WITHOUT RECOURSE TO ENFORCE PAYMENT OF THE UNPAID SUBSCRIPTION OF A? No. It can go for a Direct Action in Court. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 51 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. ASSUME THAT THERE IS A DELINQUENCY SALE HELD AND CONDUCTED BUT IT WAS CONDUCTED NOT IN ACCORDANCE WITH THE PROCEDURES LAID DOWN IN THE CODE. EXAMPLE: THERE WAS NO PUBLICATION OF THE AUCTION SALE OR WAS ONLY PUBLISHED ONCE. A’S SHARES WERE SOLD WITH ONLY ONE PUBLICATION. CAN A QUESTION THE VALIDITY OF THE SALE OF HIS SHARES AT PUBLIC AUCTION? Two conditions would be required in order that he may question the validity of the sale of his shares at public auction. REQUISITES TO ASSAIL A DELIQUENCY SALE (1) He must tender payment of the acquisition cost to the winning bidder; and (2) He must institute the claim or complaint within six months from the date of the sale Absence of any one of them, he cannot question the validity of the sale of his shares at public auction even if it was irregularly or illegally bidded out. Rationale of the 6-month period: There may be an instance that a certain person is interested because if the corporation can raise money, he knows that it will be back in its two feet. Q. WHO IS THE WINNING BIDDER IN A DELINQUENCY SALE? The bidder who tenders to pay the full amount of the delinquency plus cost and expenses, if any, for the least number of shares. Q. IS THERE SUCH A THING AS “HIGHEST BIDDER” IN A DELINQUENCY SALE? None. In fact, the winning bidder is the Lowest Bidder from the wordings of the statute, that is. The bidder who tenders to pay the full amount of the delinquency plus cost and expenses, if any, for the least number of shares. Example: X, Y and Z bidded for the delinquency sale of shares of A. They have to tender the full amount of the unpaid subscription plus cost and expenses, if any for the least number of shares. So all of them will bid P505,000 for the 100,000 shares of A. X says he will acquire 99,000 shares for P505,000. Y says he will acquire 95,000 shares. The winning bidder is Z. He is the Lowest bidder, not the highest bidder. Effectively, the winning bidder in a delinquency sale is the Lowest bidder. The 90,000 shares will now be credited or registered in the name of Z. The 10,000 shares remaining will still remain in the name of the delinquent stockholder, he remains to be a stockholder. Section 71. Effect of delinquency. – No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. Q. WHAT HAPPENS IF A’S SHARES HAS BEEN DECLARED DELINQUENT? WHAT IS THE EFFECT OF DELINQUENT SHARES VIS A VIS THE RIGHTS OF THE DELINQUENT STOCKHOLDER? He loses his right to vote and be voted upon and is not entitled to any of the rights of a stockholder, except the right to receive dividends in accordance with Section 43. Section 43 (1). Power to declare dividends. The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. (16a) Section 43 provides that if the shares are delinquent, then: Any cash dividends due the delinquent stockholder shall first be applied to the amount of his delinquency plus cost and expenses, if any. If any of it remains, it would be paid to him. But if it is a stock dividend, it shall be withheld from him until he pays the amount of his delinquency. Z said he will acquire 90,000 shares. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 52 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Q. A’S SHARES ARE DELINQUENT. HE IS A DIRECTOR OF THE CORPORATION. PENDING THE SALE OF HIS SHARES, IS HE STILL QUALIFIED TO BE A DIRECTOR? OWNERSHIP OF SHARES OF STOCKS STANDING IN HIS NAME IN THE BOOKS OF THE CORPORATION IS THE QUALIFICATION IN ORDER THAT ONE MAY BE A DIRECTOR. WILL HE LOSE HIS RIGHT TO BE A DIRECTOR? No, until and unless all his shares are bidded out and sold to the winning bidder, he remains the owner of the shares of stock. It is still registered in his name in the books of the corporation. Therefore, he remains as a stockholder, and even if it may be sold at public auction, he can still continue acting as the director. LOST OR DESTROYED CERTIFICATE The lost or destroyed certificate may be replaced after (1) year from the date of the last publication. Section 73. Lost or destroyed certificates. – The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1) year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a) Q. MAY IT BE ISSUED EARLIER THAN 1 YEAR? Yes. If the owner files a bond satisfactory to the Board of Directors. CORPORATE BOOKS AND RECORDS Section 74. Books to be kept; stock transfer agent. – Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 53 AUSL/CORPORATION LAW REVIEWER/AJP-SFO minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the "stock and transfer book", in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable. (51a and 32a; P.B. No. 268.) Section 75. Right to financial statements. – Within ten (10) days from receipt of a written request of any stockholder or member, the corporation shall furnish to him its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year, showing in reasonable detail its assets and liabilities and the result of its operations. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a financial report of the operations of the corporation for the preceding year, which shall include financial statements, duly signed and certified by an independent certified public accountant. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation. (n) All corporations registered under the general provisions of the Code are required to keep certain books and records. (1) Records of all business transactions. (2) Minutes of meetings of all stockholders and the directors (3) Stock and transfer book (4) Membership book, in cases it is non-stock corporation (5) Financial statements These books and records are subject to inspection by the stockholders or members during reasonable hours on any business day. Either personally, or through his authorized representative, either with or without the presence of the stockholder himself. (W. Philpats v. Phil. Manufacturing Corp.) Non-stockholders, even if they are the heirs of the deceased stockholder cannot inspect corporate books and records of the corporation where their parent may have been such a shareholder. In the case of Joselito Puno vs. Puno Enterprises, the right of inspection of the corporate books and records is based upon his ownership of shares in the corporation and the necessity of self-protection. After all, a stockholder has the right to be intelligently informed about the corporate affairs. Such right rests upon the underlying corporate assets and property. Similarly therefore, only stockholders of record are entitled to dividends declared by the corporation a right inherent in ownership of shares. In this case, the owner passed away. The Supreme Court ruled that, upon the death of a stockholder, the heirs do not automatically become the stockholders of the corporation and acquire the rights and privileges of the deceased shareholder of the corporation. The stocks must be distributed first to the heirs in estate proceedings and the transfer of stock must be recorded in the books of the corporation as required by Sec. 63 of the Code. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 54 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The corporation, as a rule of thumb, will not look beyond its stock and transfer book to determine who its stockholders are, who may have the right to vote, be voted upon, receive dividends, inspect the corporate books and records. If you are not one of them listed in the stock and transfer book, you have no right as a stockholder at all. Shares must first be transferred in favor of the heirs of the deceased stockholder through an intestate proceeding or extrajudicial. Until and unless it has been recorded in the books of the corporation, nobody can vote or receive dividends for and in behalf of the deceased stockholders. Q. MR. A IS A STOCKHOLDER OF A HOLDING COMPANY. EXAMPLE, SAN MIGUEL CORPORATION, BUT HE IS NOT A STOCKHOLDER OF SAN MIGUEL BREWERY INTERNATIONAL, LTD. IN HONGKONG. CAN HE INSPECT THE BOOKS AND RECORDS OF SAN MIGUEL BREWERY LTD. IF HE IS NOT A STOCKHOLDER OF THAT SUBSIDIARY BUT HE IS A STOCKHOLDER OF SAN MIGUEL CORPORATION ITSELF? (Gokongwei vs. SEC) GR: No. XPN: But in this case, San Miguel Brewery International is a Wholly Owned Subsidiary of San Miguel Corporation. Meaning, all the shares of stocks are owned and held by San Miguel Corporation. It would be more in accord with equity, good faith and fair dealing to construe the statutory right of the stockholders’ right of inspection to cover the books and records of the Wholly Owned subsidiary. It must, however, be wholly owned. Because apparently, the 2 entities , the holding and the subsidiary, are legally being operated as separate and distinct companies. There’s no such thing as right of inspection that may be granted to the stockholder of the holding company if he is not also a stockholder of the subsidiary. Q. AYALA CORPORATION IS ALSO A HOLDING COMPANY. AMONG THE SUBSIDIARIES ARE AYALA LAND, INC., GLOBE TELECOMM., BPI. THESE ARE SUBSIDIARIES OF AYALA CORPORATION. A IS A STOCKHOLDER OF AYALA CORPORATION BUT HE IS NOT A STOCKHOLDER OF AYALA LAND, BPI OR GLOBE TELECOMM. CAN HE INSPECT THE BOOKS AND RECORDS OF GLOBE, BPI OR AYALA LAND? No. They are not Wholly Owned Subsidiaries of Ayala Corporation. In fact, all these 3 subsidiaries are listed companies. Listed in the sense that the shares are being traded openly in the stock exchange. No right of inspection on the part of Mr. A who is a stockholder of Ayala Corporation over the subsidiaries of Ayala Corporation because they are treated separately and independently. In fact, under the law, all these corporations have independent directors as required by law. GR: The corporation Cannot Refuse the stockholders to inspect the books and records if it is during reasonable hours on any business day; And if they are refused, the remedy available to the stockholders again would be: (1) Mandamus with a claim for damages and/or attorney’s fees (2) Criminal Complaint for a violation of its right under Section 144 of the Code. XPN: The corporate officers involved have some defensive positions that they may advance in order to justify their failure or refusal to allow the right of inspection: (1) Improper use of information secured through previous examination; or (2) That he is not acting in Good Faith or for a Legitimate Purpose. NB: Note that this right of inspection may also be Restricted or Regulated. In the case of Gonzales v. PNB, Gonzales was able to acquire 1 share of the capital stock of the PNB and he wanted to inspect the books and records of the bank. But PNB was created by special charter. It has its own charter created by special law. And the special law creating the charter of PNB provides that the financial books and records of the PNB shall be subject to inspection ONLY by the Monetary Board of the Central Bank. Q. CAN GONZALES INSPECT THE BOOKS AND RECORDS? No. Section 4 of the Code provides that, Corporations created by law shall be governed primarily by the law of their creation supplemented only by the provisions of the Code when pertinent. WHAT APPLIES? It is the special charter creating it. It will NOT be the Corporation Code. He is not entitled to inspect the books and records of the PNB. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 55 AUSL/CORPORATION LAW REVIEWER/AJP-SFO MERGERS AND CONSOLIDATION Section 76. Plan or merger of consolidation. – Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. (n) 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; Section 78. Articles of merger or consolidation. – After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 1. The plan of the merger or the plan of consolidation; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. (n) Section 79. Effectivity of merger or consolidation. – The articles of merger or of consolidation, signed and certified as herein above required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective. The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: Section 77. Stockholder’s or member’s approval. – Upon approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the AUSL/CORPORATION LAW 3. As to each corporation, the number of shares or members voting for and against such plan, respectively. (n) If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code. (n) Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following effects: REVIEWER/AJP-SFO P a g e | 56 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Example: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation. (n) EFFECTS OF CONSOLIDATION MERGERS AND/OR The surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges and immunities and franchises of each of the constituent corporations. Constituent corporations – are the parties to the Merger or Consolidation. All property and all receivables due on whatever account, including subscriptions to shares and other choses in action and all and every other interest of, belonging to, or due to each constituent corporations shall be deemed transferred and vested in the surviving or consolidated corporation without further act or deed A absorbed X company. The absorbed corporation has debts of P100M to Z. Such debt is already the debt of the absorbing corporation automatically because item 4 says, “Without further Act or Deed”. Q. A LENT P100M. B ABSORBED A COMPANY. CAN THE ABSORBING CORPORATION ENFORCE THE CLAIM OF A AGAINST THE DEBTOR? Yes. Automatically, without any further act or deed Q. IN THE CASE OF BPI V. BPI EMPLOYEES UNION, BPI ABSORBED FAR EAST BANK AND TRUST COMPANY (FEBTC). ARE THE EMPLOYEES OF FEBTC ALSO ABSORBED BY BPI? The Supreme Court held No. In legal farlance, human beings are never embraced in the term Assets and Liabilities. They are not chattels. Moreover, BPI’s absorption of former FEBTC employees was neither by operation of law nor legal consequence of the contract. There was no government regulation or law that compelled the merger of the 2 banks or the absorption of the employees of the dissolved or absorbed corporation by the surviving corporation. Had there been such a regulation, the absorption of the employees of the nonsurviving entity or the absorbed entity of the merger would have been mandatory on the surviving corporation or the absorbing corporation. In fact, the Corporation Code does not also mandate the absorption of the employees of the non-surviving corporation in cases of merger. Otherwise, this would have been included in Section 80. The articles of merger and the plan of merger dated April 2000 did not contain any specific stipulation with respect to the employment contracts of the existing personnel of the dissolved or the absorbed corporation. Unless expressly assumed, labor contracts such as employment contracts and CBAs are not enforceable against a transferee of the enterprise. Why? Because labor contracts are in personam and therefore, binding only between the parties. A labor contract merely creates an action in personam and does not create any real right which should be respected by 3rd parties. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 57 AUSL/CORPORATION LAW REVIEWER/AJP-SFO This conclusion draws its force from the right of the employer to select who its employees should be and to decide when to engage them as protected under the Philippine Constitution. The same can only be restricted by law through the exercise of police power. It is contrary to public policy to declare the FEBTC employee, the employees of the absorbed corporation, as forming part of the assets and liabilities of FEBTC that were transferred and absorbed by BPI in the articles of merger. Assets and liabilities in this instance should be deemed to refer only to Property Rights and Obligations. APPRAISAL RIGHT Section 81. Instances of Appraisal right. – Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: Because the amendment must change or restrict the right of the stockholder involved. To some, it may not change or restrict the right of the stockholder. To others, it may change or restrict the right of the stockholder. Under Section 86, one of the instances when the dissenting stockholder may lose his right to be paid the value of his shares is when the proper forum, the SEC, finds that the stockholder is NOT entitled thereto. As a general rule, in order that the dissenting stockholder may be able to be paid the fair value of his shares, the corporation must have Unrestricted Retained Earnings. Q. WHAT HAPPENS IF HE IS NOT PAID THE VALUE OF HIS SHARES? He will recover his position or rights and privileges as a stockholder entitled to receive dividends. 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; Because the effect, from the time of the demand of the fair value of the shares of stocks or until the action, corporate act or transaction has been abandoned, all rights accruing to the shares of the stockholder exercising his appraisal right including voting and dividend rights will be suspended. 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and Provided that if the stockholder is NOT paid the value of his shares within 30 days after the award, his voting and dividend rights shall be immediately restored. 3. In case of merger or consolidation. (n) Q. MAY THE STOCKHOLDER EXERCISING HIS APPRAISAL RIGHT, IF ALSO A DIRECTOR, LOSE HIS RIGHT TO BE AND ACT AS A DIRECTOR? Q. WHAT IS APPRAISAL RIGHT? The right of a stockholder to object on certain corporate acts and transactions and compel the corporation that he be paid the fair value of his shares. No. Unless his shares have been fully paid by the corporation, he remains the stockholder of record. This right is not, therefore, at all times available in all matters where a stockholder may dissent on corporate acts or transactions. It is available only in the instances provided for by law. Section 81 enumerates the intances when the dissenting stockholder may exercise this right. Q. AT WHAT POINT IN TIME OR WHEN WILL THE FAIR VALUE OF THE SHARES OF THE OBJECTING STOCKHOLDERS BE DETERMINED OR BASED? But it may also be exercised under Section. 42 of the Code: NON-STOCK CORPORATIONS Investments of corporate funds in another corporation or business other than the primary purpose, the objecting stockholder, if such be the case, may exercise his appraisal right as per specific provision of Sec. 42. NB: Note that this is not available in all instances, under item 1 of Section 81, in amendments of articles of incorporation. The day before the meeting interposed his objection. where he Section 87. Definition. – For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 58 AUSL/CORPORATION LAW REVIEWER/AJP-SFO which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporation, when pertinent, shall be applicable to nonstock corporations, except as may be covered by specific provisions of this Title. (n) GR: Cumulative voting is not generally allowed. XPN: The By-laws of a Non-Stock Corporation may limit, broaden or deny voting rights of the members. So the articles and by-laws may also allow members to cumulate their votes in the election of directors. Section 88. Purposes. – Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations. (n) GR: The members are entitled to proxy voting. A non-stock corporation is one where no part of its income is distributable as dividends to the members, trustees or officers. In Stock Corporations, there’s no such thing as voting by other similar means. They may cast their written assents in amendment of the articles of incorporation. TWO REQUISITES IN ORDER THAT A CORPORATION MAY BE CONSIDERED AS STOCK: XPN: Proxy voting may be denied by a provision in the articles or by-laws of a non-stock corporation. Members in Non-Stock corporation may vote by mail or other similar means subject to the rules and regulations that may be imposed by the SEC. (1) Capital stock divided into shares; In Non-Stock, the SEC may allow members to vote by other similar means subject to the terms and conditions that may be imposed by that government agency. (2) Authority to distribute allotments of its surplus profits by way of dividends GR: The nature of membership is generally Personal and Non-Transferrable The provision under Section 87 governing Stock Corporations, when pertinent, also applies to Non-Stock Corporations, except as may be covered by specific provisions of Title 11. XPN: Unless the by-laws provide otherwise. It may however, be subject to transfer if the bylaws allow transfer. VOTING RIGHTS OF MEMBERS IN A NONSTOCK CORPORATION. Section 89. Right to vote. – The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code. (n) Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the Securities and Exchange Commission. In the case of a non-stock corporation, under Section 89: Each member shall be entitled to 1 vote per candidate. Q. CLUB SHARES, THEIR SHARES ARE SUBJECT TO TRANSFER BUT WILL THE TRANSFEREE HAVE THE SAME RIGHT, PRIVILEGE TO COMPEL THE CORPORATION THAT HE BE RECOGNIZED AS A MEMBER? No. Admission of membership is subject to the rules and regulations that may be imposed by the non-stock corporation. In the Cebu Country Club Case, a non-profit and non-stock membership club may have the right to approve or disapprove an application for proprietary membership. The right should not be exercised arbitrarily. In this case, there was an amendment of the Articles of Incorporation of Cebu Country Club. Section 3 of the Cebu Country Club’s by-laws, requiring the unanimous vote of the directors for the admission of membership in the club. But it was not printed in the application form that was handed to the applicant. The original provision of the by-laws was silent regarding the manner in which one may be admitted as to how many votes. So, under the original provision then, majority vote was required. But the amendment was introduced requiring now the unanimous vote of the Board of Directors. The amendment took place more than 12 years prior to the AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 59 AUSL/CORPORATION LAW REVIEWER/AJP-SFO application of the petitioner. Petitioner filled up the old form. Cebu Country Club explained that the amendment was not printed in the application due to economic reasons. The Supreme Court held finds this excuse flimsy and unconvincing. Such amendment, aside from being extremely significant was introduced. The Court applied Section 19 of the Civil Code: Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith. trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or bylaws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. True it is that a non-stock corporation may have its own set criteria or standards in the admission of members. It cannot, however, be exercised arbitrarily. Unless otherwise provided in the articles of incorporation or the by-laws, officers of a nonstock corporation may be directly elected by the members. PLACE OF MEETING Unless otherwise provided for in the articles of incorporation or by-laws, the number may exceed 15. Section 93. Place of meetings. – The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting: and Provided, further, That the place of meeting shall be within the Philippines. Anywhere in the Philippines if there is a by-law provision authorizing it in a Non-Stock Corporation. There is no such authority granted to a Stock corporation. It must be within the territorial boundaries of the city/municipality where it has its principal office. So if there’s nothing in the by-laws in a NonStock Corporation authorizing the calling of meetings of members anywhere in the Philippines, then the same rules apply: Only within the territorial boundaries of the city or municipality where it has its principal office. Because absent any, the rules governing Stock corporations shall also apply, as provided for in Section 87 That is merely an authority under Sec. 93. It merely grants a non-stock corporation the power/authority to validly provide in their bylaws that they can hold meetings anywhere in the Philippines. TRUSTEES AND OFFICERS Example: Integrated Bar of the Philippines National Chapter, they have 21 members. It is a nonstock corporation and rightfully so, they can have more than 15 members in the Board. Other corporate officers like the President, Secretary, Treasurer, among others may be directly elected by the members. However, not all Corporations may elect the other corporate officers. Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: Section 92. Election and term of trustees. – Unless otherwise provided in the articles of incorporation or the by-laws, the board of AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 60 AUSL/CORPORATION LAW REVIEWER/AJP-SFO 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. CLOSE CORPORATIONS Section 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides. All the 3 qualifying conditions provided for under Sec. 96 must be present in order for it to be considered as a close corporation. (San Juan Structural Steel v. CA) THE QUALIFYING CONDITIONS REQUIRED BY LAW MUST ALL BE PRESENT: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Therefore, the fact that husband and wife own 99.98% of the shares of stocks of a corporation, the .2% being held by their children will not make it a close corporation. The family corporation was supposed to have been organized that way but there were NO continuing provisions in the Old Corporation Law that would guarantee the continued existence of the family corporation as may have been intended by the stockholders. The old law did not contain any provision as to the number of stockholders in a family corporation. So a family corporation therefore, may not necessarily be a close corporation. (San Juan Structural Steel v. CA). There was also no provision in the old law as to who may qualify to own or hold shares of stocks in a family corporation. Whereas Section 96, in relation to Sec. 99 requires that they shall be held by specified persons. The old law likewise did not mandate the family corporation to provide in its articles of incorporation that its shares of stocks shall be subjected to one or more specified restrictions on their transfer. While the law as it stands now, requires the Close corporation to provide for restrictions on transfers of shares of stocks in all of its classes of shares. All of its shares of any class are subjected to one or more specified restrictions allowed by the Code. In the old law, there was no prohibition for the family corporation to list their shares in the stock exchange or to make public offering with respect to their shares. While the law now bars close corporations from listing their shares in the stock exchange or make any public offering of any of its shares of stock. Note that not any type of business or endeavor may be undertaken by a close corporation. 2nd paragraph of Section 96 provides that Close corporations cannot be formed for purposes of engaging in: (1) Mining/of oil companies, (2) Stock Exchange; (3) Banks; (4) Insurance companies; AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 61 AUSL/CORPORATION LAW REVIEWER/AJP-SFO or appointed by the stockholders, instead of by the board of directors. (5) Public utilities; (6) Educational institutions and corporations declared to be vested with Public Interest. DISTINCTION OF CLOSE AND ORDINARY CORPORATION The special provisions of Title XII of the Code applies only to a Close corporation. As a matter of comparison between the close corporation and the ordinary regular corporation, there are numerous actual and possible distinctions between the close corporation and the regular/ordinary stock corporation: (1) The Number of Stockholders. In a Close corporation, 20 specified persons; In an Ordinary stock corporation there is no limitation as to their numbers and ordinarily, it does not specify who may become a stockholder (2) The Number of Directors Section 97. Articles of incorporation. – The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected If there are 20 stockholders and the stockholders themselves are considered directors, then effectively, you have 20 directors. Ordinarily in stock corporations, not less than 5, not more than 15; (3) Shares of Stock In a Close corporation, all of its shares of any class are subjected to one or more specified restrictions on transfers of share. While in ordinary stock corporation, generally, there are no restrictions. Generally in the sense that, it is discretionary on the part of other stock corporations to also provide certain reasonable restrictions on transfers of shares but they are merely discretionary. Unlike in a Close corporation, where it is mandatory. Shares of stocks of a Close corporation cannot be sold openly to the general public or listed in the stock exchange; There is no such prohibition in the other type of Stock corporation. (4) Management of the Corporation Stockholders in a close corporation can take active part in the management of the corporation by vesting management unto them. Unlike in the case of ordinary stock corporation, where it is specifically provided that all corporate powers, all business are conducted and all properties are controlled by the Board of Directors. (5) Liability Section 100(5). Agreements by stockholders. 5. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Those active in the management in a close corporation are personally liable for corporate tort unless the corporation has obtained an adequate liability insurance. While directors of ordinary stock corporations are liable only if they have acted fraudulently, in bad faith or in gross negligence. (6) Validity of Corporate Act AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 62 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Directors in a close corporation, if there is any, can validly act even without a meeting. While directors in ordinary stock corporations, as a rule, they must act as a body at a duly constituted meeting. Agreements between stockholders of a close corporation regarding the operation and affairs of the corporation can be validly made, under Section 100, which would have no binding force and effect in ordinary stock corporations since stockholders agreements cannot limit the discretion of the board in the management of the corporate affairs. (7) Articles of Incorporation The articles of incorporation of a close corporation may also provide that all officers and even employees shall be elected or appointed by the stockholders. Whereas, in ordinary stock corporations, they are elected by the Board of Directors. Likewise, the articles of incorporation of a close corporation may provide for a greater quorum and voting requirement in meetings of Stockholders And Directors, as provided for in Section 97. Whereas in case of ordinary stock corporation, while the articles or by-laws may provide for a greater quorum and voting requirements in Directors’ Meetings, under Sec. 25, those for the stockholders’ meeting cannot be altered Rationale: Doctrine of Limited Capacity (8) Pre-Emptive Right Section 102. Pre-emptive right in close corporations. – The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. The Pre-emptive rights of a stockholder in a Close Corporation is absolute if not denied by a provision in the articles of incorporation. Example: Those issued in compliance with good faith with the approval of the stockholders owning or representing at least 2/3 of the outstanding capital stock in exchange of property needed by the corporation or previously incurred indebtedness, Pre-Emptive rights cannot be exercised in Ordinary Stock Corporation even if it is not denied by a provision in the articles. If a Close Corporation is involved, the situation is different. Section 102 provides that it may be exercised even for money or previously incurred indebtedness or for property needed by the corporation. It speaks of all issues without any exception. Q. FIRST EXCEPTION: THOSE THAT ARE ISSUED IN COMPLIANCE WITH THE LAW REQUIRING MINIMUM STOCK OWNERSHIP BY THE PUBLIC, WILL THIS NOT APPLY TO A CLOSE CORPORATION? There’s no such animal as public offering in a close corporation. It cannot list in the stock exchange or make any public offering of any of its shares of any class. That is why it is said that if it is not denied by a provision in the articles of incorporation or any amendment thereto, the pre-emptive rights of stockholders in a close corporation will thereby be absolute. (9) Appraisal Rights Section 105. Withdrawal of stockholder or dissolution of corporation. – In addition and without prejudice to other rights and remedies available to a stockholder under this Title, any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. Likewise, a stockholder of a Close Corporation can withdraw therefrom and compel the corporation that he be paid the value of his shares for any reason. With a limitation only that the corporation has sufficient assets to cover its debts and liabilities exclusive of capital. Meaning, there is no need for the corporation to have unrestricted retained earnings in order that the withdrawing stockholder may be paid the value of his shares. While in ordinary stock corporation, they may do so only in the exercise of their appraisal right, under Sec. 81 or unless, of course, they sell their shares to another person. (10) Business Judgment Rule The Business Judgment Rule which is obtaining in Ordinary Stock Corporation may not apply to a Close Corporation in cases of Deadlocks. (sec.104) AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 63 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The proper forum may interfere in the management of the corporate affairs in a Close Corporation in cases of deadlocks and may even order the dissolution, among others, of the corporation even if the stockholders and/or directors are acting in good faith within the scope of their powers and authority. If that is the case in Ordinary Stock Corporation, the courts cannot interfere in the business judgment of the directors, stockholders. But in a Close Corporation, Section 104 is specific and it may even appoint a provisional director who will break the deadlock. In a Close Corporation, it may provide for a greater quorum and voting requirement in stockholders’ meeting so if the articles provide that the voting requirement in investments of corporate funds in another purpose or business other than the primary purpose shall be 3/4 (75%), if this is not met, there will be a deadlock. Q. WHAT IS THE REMEDY AVAILABLE? Any stockholder may file a petition before the proper forum that it interferes and the proper forum may even appoint a provisional director who will break the deadlock. He may cast a deciding vote. Q. WHO IS THE PROVISIONAL DIRECTOR? Appointee of the court. He is the extension of the court. He directly interferes in the management of the corporate affairs. The court or even the provisional director himself may even compel a stockholder that he sell his shares to the corporation irrespective of the existence of unrestricted retained earnings. The court/the provisional director may even prevent the implementation of any provision or any resolutions passed by the stockholders or the directors. (11) Transfer of Shares Section 99. Effects of issuance or transfer of stock in breach of qualifying conditions. 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction. 4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee. 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. 6. The term "transfer", as used in this section, is not limited to a transfer for value. 7. The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied. Likewise, the transferee of the shares of stocks of a Close Corporation cannot compel the Close Corporation to register in its books the transfer at the objection of any one stockholder, if it breaches any of the qualifying conditions provided for in the articles of incorporation under Section 99. Q. A STOCKHOLDER SOLD HIS SHARES TO A PERSON NOT SPECIFIED. CAN THAT TRANSFEREE COMPEL THE CORPORATION TO REGISTER THE TRANSFER? No. At the objection of any one stockholder of a Close Corporation, it cannot be registered. Whereas, in the case of Ordinary Stock corporation, it is generally a ministerial duty on the part of the corporation to register the AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 64 AUSL/CORPORATION LAW REVIEWER/AJP-SFO transfer, as provided for in the case of Rural Bank of Lipa v. CA. If it is refused without good cause, it may be compelled to do so by mandamus. (12) Dissolution Any stockholder in a Close Corporation may petition the proper forum for the corporate dissolution of the said company on the grounds, among others, provided for under Section 105. If you take a look at Sec. 105, even mere dishonesty or any act that is detrimental to any stockholder is a ground for the dissolution of the Close Corporation. Whereas dissolution may be had only in Ordinary Corporations on the grounds provided for by the Corporation Code, PD 902-A, and other special laws. Dissolution is not the appropriate remedy of a stockholder if they are protected or they may be protected in some other legal means. In the case of Republic v. Bisaya Land Transport Co, there was misuse and misapplication of the funds of the corporation by certain corporate officers to the detriment of the corporation and the stockholders. It is an Ordinary corporation. The 2 stockholders went to court and sought for the dissolution of the corporation. The Supreme Court held that, no you have other remedies available in law Q. WILL THIS CORPORATION? APPLY IN A CLOSE No. Because even mere dishonesty, any act that may be detrimental to any of the stockholders or the corporation itself is a ground for the dissolution of a Close Corporation. SPECIAL CORPORATIONS TWO TYPES OF SPECIAL CORPORATIONS: (1) Educational (Stock or Non-Stock) (2) Religious (Corporation Sole or Religious Society) EDUCATIONAL CORPORATIONS Section 106. Incorporation. – Educational corporations shall be governed by special laws and by the general provisions of this Code. (n) must be incorporated within a period of 90 days under the provisions of the Corporation Code. This refers to institutions of learning issuing certificates of completion in the academic field. The governing board in an Educational Stock corporation should not also be less than 5 but not more than 15. It can be anywhere between 5-15. But this is not entirely true. Because if it is an Educational Non-Stock Corporation, the number of the governing board should be in multiples of 5 only. Q. WHO MAY BE MEMBERS OF THE BOARD OF DIRECTORS? Art. XIV, sec. 4, 1987 Constitution— Educational Institutions other than those established by religious order, mission boards and charitable organizations shall be owned solely by citizens of the Philippines or corporations 60% of the capital is owned by such citizens. The control and administration of educational institutions shall be vested in citizens of the Philippines. GR: Therefore, foreigners may own or hold shares in an Educational Corporation, but they are not generally qualified to be members of the Board of Directors. Because directors are corporate managers and the management of educational institutions are vested solely to citizens of the Philippines. XPN: Nonetheless, they may still qualify to sit and act as members of the Board if the educational involved is established by religious order, mission board and charitable organization. Q. MAY AN EDUCATIONAL INSTITUTION ISSUING CERTIFICATES OF COMPLETION IN THE ACADEMIC FIELD BE FORMED OR ORGANIZED AS A STOCK CORPORATION? No. Educational institutions issuing certificates of completion in the academic field can no longer be organized as a stock corporation by virtue of B.P Blg. 232. It now prohibits the formation of an institution of learning issuing certificates of completion in the academic field as a stock corporation. They may only be organized now as a non-stock corporation. In fact, under that B.P Blg. 232, those that were formed or organized as Stock corporations are being urged to convert themselves into Non-Stock corporations. The special law spoken here is the Education Act of the Philippines and under the provision of this law, once they are recognized by the government as such institutions of learning, it AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 65 AUSL/CORPORATION LAW REVIEWER/AJP-SFO RELIGIOUS CORPORATIONS Section 110. Corporation sole. – For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. Corporation Sole can be formed not by any person. It is formed and organized by one single person or individual, either by the: (1) Chief Archbishop; (2) Bishop; (3) Priest; (4) Rabbi; (5) Presiding Elder; or (6) Head of any religious Denomination, Sect or Church. Section 112. Submission of the articles of incorporation. – The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall become a corporation sole and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest, minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (n) In comparison with Ordinary corporations, it commences to exist and is vested with juridical personality upon the filing of the Articles of Incorporation with the SEC. The corporation sole has the same right, power and privilege to own, hold and acquire properties like any other corporation. Q. BUT IS THE CORPORATION SOLE POSSESSED WITH THE SAME POWER, RIGHT OR PRIVILEGE TO DISPOSE, SELL, MORTGAGE ITS REAL PROPERTIES LIKE ANY CORPORATION? Section 113. Acquisition and alienation of property. – Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may sell or mortgage real property held by it by obtaining an order for that purpose from the Court of First Instance of the province where the property is situated upon proof made to the satisfaction of the court that notice of the application for leave to sell or mortgage has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to sell or mortgage should be granted. The application for leave to sell or mortgage must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a) GR: No. It needs a court order under Section 113. True it is, under that same provision, it may own, hold, acquire properties. It cannot dispose or even encumber or even mortgage real properties. Thus, it must obtain an order by application for leave from the RTC where the real property is located for the purpose of its disposition or encumbrance. XPN: Unless it has rules and regulations or discipline providing for the method of disposition or encumbrance of real properties such court order will no longer be required for its validity. The religious societies just like any other ordinary non-stock corporation organized by not less than 5 but not more than 15 incorporators created for the purpose of securing secular purposes. In comparison to the provisions of Sec. 19 which provides that a corporation commences to exist and will be vested with a juridical personality upon the issuance of the certificate of registration or incorporation by the SEC. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 66 AUSL/CORPORATION LAW REVIEWER/AJP-SFO DISSOLUTION AND WINDING UP Dissolution is the extinguishment of corporate franchise and the termination of corporate existence. THERE ARE 3 MODES OF DISSOLUTION (1) Expiration of the corporate term; (2) Voluntary Surrender Franchise; of the Corporate (3) Involuntary Dissolution EXPIRATION OF THE CORPORATE TERM When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it is organized. There is no need to institute a quo warranto proceeding to determine up to what point in time it was dissolved because the period is provided for in the Articles of Incorporation. When such period expires without any extension having been made pursuant to law, the corporation is dissolved automatically insofar as the continuation of its business is concerned (PNB v. CFI) VOLUNTARY DISSOLUTION Voluntary Dissolution where no creditors are affected Section 118. Voluntary dissolution where no creditors are affected. – If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. Voluntary Dissolution thereby affected. where creditors are Section 119. Voluntary dissolution where creditors are affected. – Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least twothirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day’s notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, RCa) Shortening of the corporate term under Section 120 will partake of the nature of an amendment of the articles of incorporation. It may have the effect also of the dissolution of the corporation. Section 120. Dissolution by shortening corporate term. – A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 67 AUSL/CORPORATION LAW REVIEWER/AJP-SFO incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation. (n) (10) In cases of gross mismanagement and fraudulent conduct of its affairs Example: Any violation of the provision of the Securities Regulation Code may cause the revocation of the certificate of registration of a brokerage firm or those engaged in the buying or selling of securities for the account of their clients. The corporation was organized 25 years ago. Term of existence is 50 years so 25 years from now, it will be dissolved by expiration of term. But the corporation shortens the corporate term to the effect that it shall exist for a period of 50 years from the date of its registration, it shall exist only for the period of 25 years from the date of its registration. So, effectively, dissolving the corporation. It will never become valid and effective until and unless the SEC gives its stamp of approval. Unlike in ordinary amendments of the articles under Section 116 not acted upon by the SEC it shall become valid and effective on the day of its filing if not acted upon by the SEC without cause attributable to the corporation. The amendment shortening the corporate term will have the effect of a dissolution, Section 120 requires the approval of the SEC. INVOLUNTARY DISSOLUTION Other grounds provided for by special laws like the Securities Regulation Code: This is Involuntary Dissolution and involuntary dissolution is an extreme remedy and the courts proceed with extreme caution which have for their object the forfeiture of a corporate franchise and forfeiture will not be allowed except upon express limitation or for plain abuse of power for which the corporation fails to fulfill the design or purpose of its organization. But when the abuse or violation constitutes or threatens a substantial injury to the public or such as to amount to a violation of the fundamental conditions of its charter dissolution will be granted. In most cases, the courts will merely enjoy the further commission of the questioned act. Section 121. Involuntary dissolution. – A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations. (n) In the case of Republic v. Bisaya Land, there was misuse or misapplication of the corporate funds and the stockholders complained seeking for the dissolution of the corporation. The courts should not have imposed the extreme penalty of dissolution because there are other remedies available to the stockholders concerned. Upon filing of the verified petition or motu proprio on grounds provided for by law, there may also be grounds provided for by other special laws. In the first place, it does not threaten a substantial injury to the public. It is between and among themselves. (1) Non-user of corporate franchise Q. WHAT IS DISSOLUTION? (2) Continuous inoperation for at least 5 years (3) Failure to organize (4) Failure to file by-laws (5) Fraud in procuring its certificate registration under P.D 902-A of (6) Serious misrepresentation as to what a corporation can do or is doing to the damage and prejudice of the investing public and/or the corporation itself (7) Violation, refusal to comply with the lawful orders of the SEC (8) Violation of any of the provisions of the Code (9) In cases of deadlocks in a close corporation THE EFFECT OF A (1) The dissolution of a corporation not only terminates its primary franchise to be and act as a corporation but generally it also prevents it from exercising other or secondary franchises which may have been conferred to it. (2) It terminates its power to enter into contract or to continue the business as a going concern. (3) It has been held that a corporation whose corporate life expired cannot legally pursue the business for which it is organized. It cannot apply for a new certificate or a secondary franchise for it is incapable of receiving a grant. (Buenaflor vs. Camarines Sur Industry) (4) It is no longer possessed with a juridical personality to continue its business. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 68 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Neither can it enforce a contract entered into it prior to its dissolution for the purpose of continuing the business of its organization. (Cebu Port Labor Union vs. State Marine) the payment of all its debts, liabilities and obligations and the ultimate distribution of the remaining assets to the stockholders in proportion to their respective subscription or in accordance with their contract of subscription. (5) In general, debts due to or by a corporation are not extinguished by its dissolution. This is the clear import of Sec. 145 under the Miscellaneous provisions of the Code, when it provides that: Because there may be, of course, shares of stocks that are preferred in the distribution of the remaining assets of the corporation. If that be the case, then the preferred shareholders shall be entitled to receive the preference indicated in their contract of subscription before they may, of course, transfer or give the stockholders their share of the remaining assets or properties of the corporation. Section 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (n) LIQUIDATION AND WINDING UP Section 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. Despite the termination of the corporate existence and the extinguishment of the corporate franchise, a dissolved corporation, however, under Section 122 of the Code, is still possessed with a juridical personality for another period of 3 years for the purpose of prosecuting or defending suits filed for or against it or to distribute its assets and close and settle its affairs. But this 3-year period provided for under Section 122 should not be for the purpose of continuing the business for which it is formed or organized. Upon the expiration of the 3-year period, the juridical personality of the corporation ceases to exist for all intents and purposes and as a general rule, it can no longer sue or be sued. It no longer exists and has no more valid existence. (Gelano v. CA) This 3-year period of liquidation provided under Section 122, however, is not an absolute rule. THERE ARE 3 MODES OF LIQUIDATION: 1. It may be undertaken by the Board of Directors themselves; 2. By the appointment of an assignee or trustee; 3. By the appointment of a receiver or a liquidating trustee. If the corporation opts to undertake the liquidation itself through the governing Board of Directors, it will only have a period of 3 years within which to finish the task of liquidation. Claims for or against the corporation not filed within the 3-year period will become unenforceable as there exist no more corporate entity against which they can be enforced. Actions pending for or against the corporation when the 3-year period expires are abated since after that period, the corporation ceases to exist for all intents and purposes and is no longer capable of suing or of being sued. Liquidation and Winding up refers to the act of collecting all assets, properties and rights and AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 69 AUSL/CORPORATION LAW REVIEWER/AJP-SFO But if the liquidation is undertaken by a trustee, assignee, receiver, or liquidator, the 3year period will not apply. Why not? member who is unknown or cannot be found shall be escheated to the city or municipality where the property is located or organized. If a trustee, assignee, receiver or liquidator is appointed, the assets, rights properties of the dissolved corporation will be conveyed to them. The effect of the conveyance will make that person the legal owner of the properties conveyed subject only to the beneficial interest of the stockholders and creditors alike. FOREIGN CORPORATIONS So, being the legal owner, he can continue defending, to sue or of being sued for the benefit of the stockholders and creditors alike. (Sumera v. Valencia, National Abaca v. Fore and Board of Liquidators v. Kalaw) Being the legal owner, he or they can continue defending or prosecuting the case for the benefit of the stockholders and creditors alike. Q. MAY A CORPORATION DISSOLVED TRANSFER ITS ASSETS AND/OR PROPERTIES TO A NEW CORPORATION FOR THE PURPOSE OF REINCORPORATING A NEW AND CONTINUE THE BUSINESS OF THE DISSOLVED ONE? EXAMPLE: THE CORPORATION DISSOLVED AND THERE IS LIQUIDATION. IT GATHERED ALL ITS ASSETS, PROPERTIES, RIGHTS AND AFTER PAYING ALL ITS DEBTS AND LIABILITIES, THERE REMAINED MANY MORE PROPERTIES. INSTEAD OF DISTRIBUTING THESE TO THE SHAREHOLDERS IN ACCORDANCE WITH THEIR STOCKHOLDINGS, THE CORPORATION WITH THE CONSENT OF ALL THESE STOCKHOLDERS TRANSFERS THE PROPERTIES TO A NEW CORPORATION WHICH WILL CONTINUE THE BUSINESS OF THE DISSOLVED ONE. IS THAT POSSIBLE? Yes. In the case of Chung Ka Bio v. IAC, the Board of Directors is not permitted to undertake any activity outside of the usual liquidation of the business of the dissolved corporation. But there is nothing to prevent the stockholders from conveying their respective stockholdings towards the creation of a new corporation to continue the business of the old one. The Supreme Court stressed, winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. But if it does it is not unlawful for the old Board of Directors to negotiate and transfer the remaining assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders themselves have given their consent. 3rd par of Section 122 provides that any assets distributable to a creditor, stockholder or Q. WHETHER IT MAY SUE OR BE SUED IN THE PHILIPPINES? GR: It is not the lack of the required license but doing business without the license, which bars a foreign corporation from access to our courts. (Universal Shipping v. IAC) Doing or transacting business without a license is what the law says so as to bar the foreign corporation from access to our courts. Q. SO WHAT CONSTITUTES “DOING OR TRANSACTING BUSINESS” SO AS TO BAR THE FOREIGN CORPORATION FROM ACCESS TO OUR COURTS IF IT DOES BUSINESS WITHOUT THE REQUISITE LICENSE? The term “doing business or transacting business” implies a continuity of commercial dealings. First thing that you have to remember, is there continuity of commercial dealings? The performance of acts or works or the exercise of some of the functions normally incident to and in the progressive prosecution of the purpose or objects of its organization. XPN: A foreign corporation can sue and/or gain access to our courts or other administrative agencies if: (1) The act involved is an isolated one or one single transaction because there is no continuity of commercial dealings; or (2) The corporation is not here seeking to enforce any legal or contractual rights arising from or growing out of any business transaction which it has transacted in the Philippines; (Western Equipment v. Reyes, Universal Products v. CA) or (3) The purpose of the suit is to protect its corporate name, trademark, trade name, reputation, or goodwill; (General garments v. Director, Converse Rubber v. Universal Products, Fuma v. IAC) or Because we have the Treaty of Paris to which the Philippines became a signatory in 1965. The member nations, the signatory countries there allows each other’s national to sue on other’s court even without registration in its forum for the protection of industrial property rights, protection of corporate name, goodwill, trademark and its reputation whether or not it is doing or it is not doing business in the forum. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 70 AUSL/CORPORATION LAW REVIEWER/AJP-SFO (4) Or if it is based on a violation of the Revised Penal Code; (Lacoste v. Fernandez) In this case, Lacoste filed a criminal complaint for infringement under the Revised Penal Code. The Supreme Court held, No, it is not doing business. Why? Because the distributor has an independent status. The mere fact of appointing a distributor or a representative domiciled in the Philippines will not necessarily result to its “doing business”. Because if that distributor has an independent status that is not doing business. Independent Status, if the agent or distributor is acting for and in its own name, for and its own account not in the name and/or for the account of the foreign corporation. If that is the case, then the appointment of the representative or distributor is NOT doing business. (5) The party is Estopped to challenge the personality of the corporation by merely entering into a contract or transaction with it. (Communication Materials and Designs v. CA) (6) It is not instituting an action but it is merely defending a suit filed against it. (Time v. Reyes) WITHDRAWAL OF A LICENSE OF A FOREIGN CORPORATION Section 136. Withdrawal of foreign corporations. – Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met; 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines. P. D. 902-A P.D 902-A was signed into law by the then President Marcos in the 70’s at a point in time when he was still possessed with legislative powers an authority. It granted the SEC extensive powers and authority from administrative, supervisory, regulatory, investigative, prosecutory, and even adjudicative or quasi-judicial powers and functions carved out of the original jurisdictions of the Regional Trial Court. For more than 20 years, the SEC was vested with original and jurisdiction provided for under Sec. 5 of the Presidential Decree, Original and Exclusive. This original and exclusive jurisdiction of the SEC, particularly Sec. 5 and 6 of the P.D was however transferred to the courts of regular jurisdiction that may be designated by the Supreme Court pursuant to Sec. 5.2 of R.A 8799, Securities Regulation Code of the Philippines, in the year 2000. November 2002, the high Court made the designation of these regular trial courts as the Special Commercial Courts. Only them can hear and decide controversies falling squarely under Sec. 5 and Sec. 6 of the P.D. P.D says: It is possessed with original and exclusive jurisdiction to hear and decide cases involving, among others, under Sec. 5: a. Devises or schemes employed by or any act of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the investing public and/or the corporation, partners, members or associations or organizations registered with the commission; This is the provision relied upon by the SEC in pursuing revocation proceedings and the institution of criminal actions for violation of the securities laws against persons engaged in what is commonly known as “Pyramiding Schemes” or those engaged in the sale of investment contracts with a promise of a very high rate of return. Most of them are not authorized to engage in that particular activity. b. Controversies arising out of intra-corporate or partnership relations, between and among the stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they may be stockholders, members or associates, respectively; and between the corporation, the partnership or association and the State as it concerns their individual franchise to be and act as a corporation, partnership or association. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 71 AUSL/CORPORATION LAW REVIEWER/AJP-SFO c. Controversies in the election or appointment of directors, trustees or officers or managers of such corporations, partnerships or associations. d. Petitions of corporations, partnerships or associations to be declared in a state of suspension of payments in cases where the corporation, partnership or association possesses sufficient assets to cover its debts and liabilities but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities but is under management committee or a rehabilitation receiver created pursuant to the same decree. With respect controversies: to item (b), The first element requires the existence of intra-corporate relationship. The second element requires that the dispute between and among the parties must be intrinsically connected with the regulation of the corporation. If the nature of the controversy involves matters that are purely civil in character, necessarily, the case does not involve intracorporate controversy and the case may be heard by the courts of general jurisdiction and not the special commercial courts. In Peneyra v. IAC, a stockholder entered into a contract with his own corporation for the operation and management of the canteen in the corporate headquarters. The controversy arose out of a breach thereof. intra-corporate the sole criteria of determining the existence of intra-corporate controversy to place the case within the exclusive and original jurisdiction of the sec, which is now the special commercial courts was only one, that there must be an intra-corporate relationship. If there is an intra-corporate relationship, then it is an intra-corporate controversy and intracorporate relationship is a relationship between stockholders, members, directors, partners, associates, the officers, directors, etc.; or between any or all of them and the corporation; and third, the corporation and the State insofar as the right of the corporation to exist as such is concerned. If there is such a relationship, it is an intra-corporate controversy to place the case within the ambit of the original and exclusive jurisdiction now of the special commercial courts. In PSBA v. Leano, the Supreme Court held that, other than the intra-corporate relationship, the controversy must arise out of that relationship. So there are 2 things to be considered in order to place the case within the specialized jurisdiction of the special commercial courts. In Speed Distributing v. CA, the Supreme Court stressed, to determine whether a case involves an intra-corporate controversy and if it is to be heard originally and exclusively by the special commercial courts, 2 elements must therefore concur: 1. The status of the relationship of the parties. That is, there is an intra-corporate relationship; 2. The nature of the questioned, that is, the subject of the controversy. Meaning, the controversy must arise out of that relationship. The same cannot qualify to be an intracorporate controversy. Its roots being a contractual breach separate and distinct from the corporate relationship between the stockholder and the corporation. The controversy did not arise out of intracorporate relationship but by virtue of a contractual breach. Q. TRANSFERS OF SHARES OF STOCK. THE TRANSFEREE OF THE SHARES OF STOCK IS NOT AN ORIGINAL STOCKHOLDER. HE IS AN OUTSIDER AND HE ACQUIRED SHARES FROM A SELLING STOCKHOLDER. HE GOES TO THE CORPORATION TO REGISTER THE TRANSFER SO THAT IT MAY BE RECORDED IN HIS NAME AND CAN EXERCISE HIS RIGHTS AS A STOCKHOLDER. THE CORPORATION REFUSED TO REGISTER THE TRANSFER. IS THIS INTRACORPORATE IF HE SUES THE CORPORATION FOR MANDAMUS? WILL THIS BE AN INTRA-CORPORATE CONTROVERSY SUBJECT TO THE ORIGINAL AND EXCLUSIVE JURISDICTION OF THE SPECIAL COMMERCIAL COURTS? OR MAY IT BE HEARD BY ANY ORDINARY REGULAR COURT? In Rivera v. Florendo, respondents are merely seeking to register as stockholders due to an alleged sale of shares of stock. The same is not an intra-corporate controversy and the regular courts have jurisdiction. They are not yet stockholders. In this case, the alleged vendor did not endorse the certificate of stock that was allegedly sold by him in favor of the purchaser and he even specifically resisted that registration of the transfer in the stock and transfer book of the corporation. There was therefore no compliance with the mode and manner of transferring shares as mandated by Section 63 which says, “Endorsement and Delivery of the stock certificate”. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 72 AUSL/CORPORATION LAW REVIEWER/AJP-SFO In Abejo v. Dela Cruz, the Supereme Court ruled, that there is no requirement that a stockholder of a corporation must be a registered one in order that the SEC may take exclusive and original cognizance of the suit seeking to enforce his right as a stockholder. Because the SEC under the mandate of the P.D, Section 5 has absolute jurisdiction, supervision and control over corporations and it’s even called upon to enforce the provisions of the Corporation Code, among others, the stock purchaser’s right to have his name recorded in the books of the corporation. In this case: The certificate was endorsed and delivered to the transferee and the corporation was notified of the transfer. But the corporation refused the registration. The Supreme Court held that this is intracorporate dispute because the transferor has done all that he can and within his powers and all that is required in order that he may be considered as a stockholder. The provisions of Sec. 63 regarding transfers of shares have been duly complied with. If he is merely seeking to be recognized as a stockholder and the requirements for a valid transfer has not been complied with, it will not be an intra-corporate controversy. It is cognizable originally and exclusively by the special commercial courts. XPN: This exclusive and original jurisdiction will not apply: (1) If the controversy is PURELY a labor dispute; (2) If the main cause of action is for the recovery of unpaid wages, separation pay and attorney’s fees without questioning the validity of his removal or his ouster. (Midland Construction v. Mobilia) So the main consideration therefore, for purposes of determining whether it is the NLRC or the special commercial court that is possessed with jurisdiction is, whether or not the corporate officer involved asserts his right as such officer or questions the manner or the validity by which he was removed or ousted therefrom. If that is the case, then it is the special commercial court. If he does not question the manner in which he was removed, but he merely seeks for separation pay, backwages, etc.—then the NLRC. Sec. 5 also speaks of suspension of payments. But if the law or the manner in which transfer is to be effected has been duly complied with, he is for all intents and purposes already a stockholder under the Abejo ruling and it will become an intra-corporate controversy. Petitions of corporations or associations to be declared in a state of suspension payments Note the Financial Insolvency Act of 2010: Rehabilitation and So it depends whether or not he has already complied with all the requirements of the law in order that he may be rightfully considered as a stockholder. This matter rehabilitation, suspension of payments is now covered by the Financial Rehabilitation and Insolvency Act. If not, then it is not within the exclusive or original jurisdiction of the special commercial court. But the basics of suspension of payment and rehabilitation is similarly situated with the P.D 902-A. But if it is in compliance with the law, then it is intra-corporate only within the original and exclusive jurisdiction of the special commercial courts P.D 902-A, this was an amendment introduced during the effectivity of P.D 902. It was amended by insertions of these provisions on suspensions of payments and rehabilitation of distressed corporations. For as long as the controversy revolves around the question of the validity of the appointment, election, or of removal of corporate directors and officers Elected or Appointed by the Board Of Directors, then the controversy is exclusively cognizable by the special commercial court and not the NLRC. (Tabang v. NLRC) As long as the particular officer involved was elected by the Board of Directors and he questions the propriety or the manner or the questions the validity by which he was removed or ousted: The proper forum may issue an order suspending payments of claims against a distressed corporation in accordance with Section 5(d) of the P.D. The last sentence of Sec. 16 also provides that upon appointment of a Management Committee, Rehabilitation Receiver Board or Body: All actions for claims against the distressed corporation, partnership or association under management or receivership pending before AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 73 AUSL/CORPORATION LAW REVIEWER/AJP-SFO any court, tribunal, board or body shall be suspended accordingly. THERE ARE 3 TYPES OF SUSPENSION OF PAYMENTS 1. Simple suspension of payments, which would be the mere deferments of the payment of corporate liabilities or obligations where the corporation has sufficient assets to cover its debts and liabilities but merely foresees the impossibility of meeting them when they fall due without appointment of a receiver or a rehabilitation plan. Example: A Construction company engaged in general construction enters into a contract with the GSIS, Pag-Ibig and/or SSS for the construction of 1,500 medium-sized housing units for the members of these government agencies. The stipulation provides that they will be paid 50% upon of 50% completion of the project and the remainder, upon the completion of the entire project. There was a stipulation as to when the 50% payment will be made but there are circumstances which prevented the completion of the project. Of course, the construction company secured a loan to mobilize the project. The financial institution is now bent on foreclosing the assets of the corporation including the buildings or the houses they have already constructed. Of course, it has collectibles from GSIS, PagIbig and SSS but it cannot yet collect because the project has not yet been completed. This particular company can go to the proper forum and seek for an order suspending the payment of all actions or claims against it. Let’s say for another 6 months until the entire project will have been completed and it can already collect from the SSS, Pag-Ibig and/or GSIS. Considering the facts attendants and of course, the contract executed between the particular corporation and GSIS, Pag-Ibig and SSS, the court will suspend actions for claims against the corporation and it will say that they should start paying the creditor on a certain specified date. It has sufficient assets to cover its debts and liabilities but it merely foresees the impossibility of meeting them when they fall due. 2. Suspension of payments with the appointment of a Management Committee or a Receiver and with or without a Rehabilitation Plan where the corporation has sufficient assets to cover its debts and liabilities but merely foresees the impossibility of meeting them when they respectively fall due. If it is without a rehabilitation plan, the Receiver or the Management Committee will be tasked to study the best way to put the company back on its two feet and will thereby recommend proper course to be taken in the proper forum. This is what Philippine Airlines did. It had debts of over $2B in the early 90s and the European creditors were already bent on foreclosing the properties of PAL. PAL went to the SEC and filed a petition for suspension of all actions for claims against it with a rehabilitation plan and the appointment of a Management Committee. The SEC then issued a suspension order and based on the rehabilitation plan it submitted, the Management Committee studied the plan and recommended to the SEC the approval of the said rehabilitation plan which was also implemented by the Management Committee. 3. Suspension of payments with the appointment of a Receiver or Management Committee with or without a rehabilitation plan where the corporation has no sufficient assets to cover its debts and liabilities. This happened in the case of Victorias Milling. Victorias Milling expanded its business. It is engaged primarily in the manufacture of sugar. It expanded its business and it used its funds supposedly to continue its production of sugar thinking that in a period of 2 years, they will have an ROI, which it did not happen. So the creditors were already bent on foreclosing the manufacturing plant of Victorias Milling. What did the management do? At a point in time when it is still within the exclusive and original jurisdiction of the SEC, they went to the SEC, filed for a petition for suspension of all actions for claims against the corporation with the appointment of a Management Committee without a rehabilitation plan and prayed that the Management Committee to be appointed shall study the best way to bring back the corporation back on its 2 feet. The SEC did just that. One of the main tasks of the Management Committee or the Receiver in cases of suspensions of actions for claims against the corporation is to meet with the creditors to discuss the possibility of putting the corporation back on its 2 feet and become operational again. What did the Management Committee do? It asked the financial creditors, banking institutions and other financial creditors of Victorias Milling if they can convert their claims into equity. They did. What happened? The liabilities of Victorias Milling were erased because the claims of the banking institutions and financial institutions were converted into AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 74 AUSL/CORPORATION LAW REVIEWER/AJP-SFO equity and barely 7 years thereafter, Victorias Milling was already back on its 2 feet and had this institutional creditors foreclose the properties of Victorias Milling, they would have incurred losses instead of making profits. When the corporation was back on its 2 feet, they sold their equity in Victorias Milling and made much more money than if they should have foreclosed the assets or properties of Victorias Milling. Yes, a corporation without sufficient assets to cover its debts and liabilities may be granted a breathing spell in order that they may get back on its 2 feet and become operational again. Q. WHAT IS THE REASON, THEREFORE, OF SUSPENDING ALL ACTIONS FOR CLAIMS AGAINST THE CORPORATION? The reason for suspending actions for claims against the corporation is not really to enable the Management Committee or the Rehabilitation Receiver to substitute the defendant in any pending action against it before any court, tribunal, board or body. (PAL v. Spouses Kurangking) Obviously, the real justification is to enable to Management Committee or the Rehabilitation Receiver to effectively exercise its or his powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue of the debtor company. To allow such other actions to continue would only add to the burden of the Management Committee or the Rehabilitation Receiver whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed towards restructuring and/or rehabilitation. EQUALITY IN EQUITY In cases of suspension of all actions for claims against a corporation, All preferred creditors will lose their preference. (RCBC v. IAC) Q. WHAT IS THE EFFECT OF THE APPOINTMENT OF A MANAGEMENT COMMITTEE, REHABILITATION RECEIVER OR BOARD/BODY OR ORDER OF SUSPENSION OF PAYMENTS FOR ALL ACTIONS FOR CLAIMS AGAINST THE CORPORATION? For the guidance of the bench and the bar: 1. All claims against the corporation that are pending before any court, tribunal or body without distinction as to whether or not the creditor is secured or unsecured shall be suspended effective upon the order of suspension of payments or upon the appointment of a Management Committee, Rehabilitation Receiver, Board or Body. 2. Secured creditors will retain their preference over unsecured ones but enforcement of their preference will be equally suspended upon the issuance of the stay order or upon the appointment of the Management Committee, Rehabilitation Receiver, Board or Body. However, in the event that rehabilitation is no longer feasible and claims against the secured or distressed corporation would eventually be settled, the secured creditors will regain their preference. For instance, let’s say there are preferred creditors but the court issues a suspension order and appoints a rehabilitation receiver, board or body. In this case, the preferred creditors and the unsecured or the unpreffered or secured will have the same status. No one can assert a preference over any other creditor. They will be paid in accordance with the approved rehabilitation plan. Q. UNDER WHAT CIRCUMSTANCES MAY A RECEIVER BE APPOINTED? Sec. 6, PD 902-A: A Receiver may be appointed whenever: 1. It is necessary in order to preserve the rights of the parties litigants; and/or 2. To protect the rights of investing public and creditors The situations contemplated in these instances are serious in nature. There must exist a clear and imminent danger of losing corporate assets if a Receiver or Management Committee is not appointed. Absent such a danger, such as where there are sufficient assets to sustain the rehabilitation plan and both investors and creditors are amply protected the need of appointing a Receiver will not exist. SERIOUS SITUATION TEST Simply put, the purpose of the law in directing the appointment of a Receiver is to protect the interest of the corporate investors and creditors. In the case of Price v. China Banking Corporation, the only basis of the Court in appointing a receiver was the finding that the petition is sufficient in form and in substance. However, it did not specify the reason or ground to sustain such a finding. Clearly, the petition failed to comply with the serious situation test. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 75 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Claims as used in the law would refer to debts or demands of pecuniary nature. All actions for claims against the corporation will be suspended accordingly. It refers to debts or demands of pecuniary nature. It means the assertion of right to have money paid. It refers to the right of payment whether reduced or not to a judgment: Liquidated or Unliquidated; Fixed or Contingent; Matured or Unmatured; Disputed or Undisputed; Equitable; Secured or Unsecured. As long as your demand is pecuniary in nature, that will be suspended upon the issuance of the stay order by the court or upon the issuance of an order appointing a Management Committee, Receiver, Board or Body. Once suspension of payments becomes effective, all actions for claims against the corporation are suspended. (PAL v. Zamora) They are ipso jure automatically suspended in whatever stage the action may be found. Even in the stage of foreclosure, execution and/or consolidation, it cannot proceed. They will all be suspended. In PAL v. Heirs of Zamora, it was ruled that he suspension of all actions for claims against the corporation involved embraces all phases of the suit. Be it before the trial court or any tribunal or before the Supreme Court. No other action may be taken including the rendition of a judgment. What are automatically suspended are the proceedings of a suit and not just payment of claims during the execution stage after the case had become final and executory. Once the process of rehabilitation, however, is completed, the Court naturally will complete the proceedings on the suspended action. The actions that are suspended cover all claims against the corporation. Whether for damages founded on a breach of contract of carriagelabor cases are not also excluded, collections suit, or any other claims of pecuniary nature. No exemption in favor of labor claims is mentioned in the law. Neither the claims of plan holders in a pre-need plan are exempted. In Philippine Islands Corporation v. Victorias Milling, unlike the provisions in the Insolvency Law which exempts secured creditors from the suspension effect of the order issued by the court in an ordinary suspension of payments proceedings, the provisions of PD 902-A, when it comes to the appointment of a Management Committee or of a Rehabilitation Receiver, does not contain an exemption for the secured creditor. All creditors will stand on equal footing. In Consuelo Metal Corporation v. Planters Development Bank, the Supreme Court held that a secured creditor’s right for closed mortgage will merely be suspended upon the appointment of a Management Committee, Rehabilitation Receiver, Board or Body, or the issuance of the stay order. Thus, the creditor or the mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation receiver proceedings or upon the lifting of the stay order. Because there are instances when, of course, the court, may have approved a Rehabilitation Plan. It is to be implemented by the Rehabilitation Receiver or the Management Committee. But there may be supervening events that would cause the impracticability of enforcing or of carrying out the plan as indicated therein. Q. ARE THE PROPERTIES OF AN INDIVIDUAL DIRECTOR OR STOCKHOLDER USED AS A SECURITY FOR THE CORPORATE OBLIGATION COVERED BY A SUSPENSION PAYMENTS ORDER BE LIKEWISE SUSPENDED? EXAMPLE: A CORPORATION NEEDS MONEY AND IT SECURES A LOAN FROM A FINANCIAL INSTITUTION. THE FINANCIAL INSTITUTION SAYS, “I WILL GIVE OUT THE LOAN, PROVIDED THAT YOU PUT UP A SECURITY.” BUT THE CORPORATION HAS NO SUFFICIENT ASSETS. THE PRESIDENT OF THE CORPORATION THEN PUT UP HIS PERSONAL PROPERTY AS SECURITY FOR THE LOAN. THE LOAN WAS GIVEN BUT THE CORPORATION WAS STILL UNABLE TO PAY. THE CREDITOR IS NOW BENT ON FORECLOSING THE MANSION OF THE PRESIDENT USED AS SECURITY FOR THE LOAN AND THE CORPORATION GOES TO THE REHABILITATION COURT AND FILED A PETITION FOR THE SUSPENSION OF ALL ACTIONS FOR CLAIMS AGAINST THE CORPORATION. THE APPROPRIATE COURT ISSUED THE STAY ORDER. CAN THE FINANCIAL CREDITOR PROCEED WITH THE FORECLOSURE OF THE PROPERTY USED AS SECURITY FOR THE LOAN OF THE CORPORATION? AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 76 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Yes. It is not an action for claims against the corporation. In Union Bank v. CA, the Supreme Court held that a creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation. It being not included in the list of stayed claims. Surety whose liability is solidary cannot claim protection from the rehabilitation court, they not being the financially distressed corporation that may be restored. That is not a claim against the corporation. Since it is not a claim against the corporation, it is not suspended and the action may proceed or the foreclosure may proceed. The wording of the law is that, “all actions for claims against the corporation will thereby be suspended accordingly.” It is the obligation of the receiver or the management committee to enforce or carry out the approved rehabilitation plan. The approved rehabilitation plan would normally carry the manner in which the creditors will be paid, sources and application of funds and the like. Under P.D 902-A, for so long as they are acting in good faith, they are not subject to suits. They are immune from suits. Speaking of intra-corporate controversies, (Sec. 5B) it is subject to another set of rules. Although the Rules of Court will supplement the said rules—the interim rules on intracorporate controversies. It is semi-summary in nature. You have to attach the affidavits of your witnesses in the pre-trial which will serve as their direct testimony in court. If you do not attach them, you will not have any evidence. Subject, of course, to cross examination by the other contending parties. There are prohibited pleadings inclusive of postponement, motions for reconsideration, and the like. Venue of actions in intra-corporate controversies would be the special commercial courts where the principal office of the corporation is located or is established. Like for instance, election or appointment of directors or officers. If it is intra-corporate controversy: it can be filed only in the special commercial court where the principal officer of the corporation is located or established. In cases of intra-corporate controversies, the ruling laid down to the effect that service of summons must be made upon the persons named in the statute does not apply in cases of intra corporate controversies. It is subject to a different rule, the interim rules on intra corporate controversies. Under sec. 5, rule 2 of the interim rules on intra-corporate controversies: If the defendant is a domestic corporation, service of summons may be made upon any of the statutory or corporate officers indicated in the by-laws or their respective secretaries. So if it is served upon any of the directors, it is valid. The court will acquire jurisdiction. In fact, if there is an assistant finance manager indicated in the bylaws as one of the officers of the corporation, then it is also valid. “Any of the statutory officers or their respective secretaries”. Appointment of Management Committee, Board or Body without suspension of actions for claims against the corporation Q. WHEN MAY THE COURT APPOINT A MANAGEMENT COMMITTEE, BOARD OR BODY EVEN WITHOUT THE PRAYER FOR THE SUSPENSION OF ALL ACTIONS FOR CLAIMS AGAINST THE CORPORATION? Under Sec. 6[D], 2 requisites must concur: 1. It must be shown that the corporate property is in danger of being wasted or destroyed. That the business of the corporation is being diverted from the purpose for which it is organized and 2. That there is a serious paralyzation of its operations. In the absence of a strong showing of imminent danger of dissipation, loss or destruction of assets or other properties of the corporation, and the paralysis of its business, the mere apprehension of future misconduct based upon prior mismanagement will NOT authorize the appointment of a management committee, receiver, board or body. If you appoint a management committee, you are resting control of the corporate affairs from the duly elected governing board of the corporation. Note, however, in the case of RJ Jacinto v. First Women’s Credit Corporation The Supreme Court upheld the appointment of a management committee for First Women’s Credit Corporation based upon the findings of the SEC hearing officer. It was based on an audited financial statement the accuracy of which was not questioned by the petitioner RJ Jacinto and the defendants in this particular case. The SEC appointed an interim management committee based on the audited financial statements which was never questioned by RJ Jacinto. The funds of the corporation were being transferred to the RJ Group of Companies without corresponding board resolutions. There was suspension of lending operations. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 77 AUSL/CORPORATION LAW REVIEWER/AJP-SFO The limitation of FWCC’s operations as a mere collection of receivables as well as the inability to pay its pending obligations amply support the conclusion that there is imminent danger of dissipation, loss, wastage or destruction of corporate assets and/or properties. Imminent Danger of dissipation, loss, wastage or destruction of corporate assets and the paralysis of its business. These are the twin requirements before the proper forum may be justified in appointing a Management Committee, Board or Body under Sec. 6 [D] of P.D 902-A. Note that the court cannot unilaterally appoint a Management Committee in businesses which are under the supervision of other government agencies. Q. FOR INSTANCE, IN CASE OF BANKING, CAN THE COURT PROCEED WITHOUT THE INTERVENTION OF THE CENTRAL BANK? No. It must be with the consent of the Central Bank or the Insurance Commission if it is an insurance company. SECURITIES REGULATION CODE The Securities Regulation Code was passed and it replaced the old law which used to be what is called as Merit Regulation where corporations who wanted to list their shares in the stock exchange would file an application for the sale of its securities in the stock exchange and it will be the SEC who will determine whether or not the public should risk their money and buy the shares of stocks in the said exchange to what is called now as the “Full Disclosure Rule”. For so long as there is full and complete disclosure of the security or the shares of the issuer, the issuer is what we call the corporation whose shares are being listed in the stock exchange or whose shares will be transacted or sold openly in the said exchange. For as long as there is complete and full disclosure of the issue in the market will be up to the investing public whether or not they will venture into that particular market or the issue. It’s no longer the SEC which will determine whether it is worth investing into. Securities as defined under Sec. 3, cannot be sold, offered for sale or distributed to the public without a registration statement having been filed and approved by the said SEC under Sec. 8 thereof. The definition of securities under Sec. 3 is broad enough particularly the last item thereof to cover any type of instrument which may in the future be determined by the SEC to have the same effect like any bonds, notes, evidences of indebtedness or shares of stocks. Even pre-need plans are considered as securities under the definition of Sec. 3. This definition of pre-need plans already came out in a decision of the SC in the case of Abrera v. Barsa. Pre-need is a contract which provides for the performance of future services or the payment of future monetary consideration at the time of actual need for which the planholders pay in cash or installment at stated prices with or without interest or insurance coverage and would include life pension, education, interment and other plans which the SEC may from time to time approve. So it is the SEC that enforces and implements the provisions of the Securities Regulation Code and therefore, it has jurisdiction over these pre-need plans of the moment. These securities enumerated in Sec. 3 as said cannot be sold, offered for sale or distributed or issued to the public without a registration statement having been filed and approved by the SEC. Note Sec. 9 and 10 which enumerate certain securities as exempted from the registration statement of the SEC and exempt transactions. They need not be registered with the SEC before they may be sold openly to the general public. Even if they are duly registered pursuant to a registration statement filed and approved by the Securities and Exchange Commission, no person can engage in the buying or selling of securities either as broker, dealer, salesman or associated person unless they are duly registered and licensed by the SEC. They have to pass a qualifying exam before they may be qualified to act as brokers, dealers or salesman. If you want to buy or sell securities in the stock exchange, you do it you course it through your broker. Example: You have a stock certificate of San Miguel Corporation. You want to sell those shares of stock. You have to course it through your broker. You must either have a cash account or margin account with your broker in order that you may engage in the buying or selling of securities in the stock exchange. Brokers are persons who are engaged in the business of buying and/or selling securities for their customers or for the account of others. Salesman, agent, of course, would be those that are employed by the broker for the purchase and sale of securities. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 78 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Dealers on the other hand are those engaged in the buying and selling of securities for their own account. SEC may prescribe of the outstanding shares of the issuer, they shall submit a report identifying the beneficial owners of the shares. The Issuer is what is called the corporation whose shares are being traded or listed in the stock exchange. This is not corporations. required in ordinary stock This is for the protection of public investors. Q. WHAT IS TENDER OFFER? WHEN SHOULD A PERSON MAKE A TENDER OFFER? Section 19 is the provision involved. (1) Any person or group of persons acting in concert and who intends to acquire at least 15% of any class of an equity security of a listed corporation, those whose shares are listed in the stock exchange for trading; or (2) Any class of equity security of a corporation with assets of at least 50M and having 200 or more stockholders with at least 100 shares each; or (3) Those who intend to acquire at least 30% of such equity over a period of 12 months shall make a tender offer to all stockholders by filing with the SEC a declaration to that effect. Even if the management now will solicit proxies, the management is now required to submit what is called as “Proxy Statement” attaching therewith the Proxy Form. The Proxy Statement consists of no less than 28 pages. It contains data as to why management is soliciting proxies including the agenda that will be taken up for that meeting. If you do not comply with that, then you will be opening yourself to the penal sanctions provided for under Sec. 73 of the SRC. The penal sanctions of Sec. 73 of the SRC include any violation of the provisions of the SRC including the rules and regulations implemented being enforced by the SEC pursuant to its rule-making power. The penal sanction is a fine of not less than P50,000 nor more than P5M and/or 7-21 years imprisonment at the discretion of the court. If you want to acquire 15% of the shares of stocks of a listed company, you have to offer to all existing stockholders to acquire their shares at the same amount or under the same terms and condition that you intend to acquire the 15%. INDEPENDENT DIRECTOR The rules and regulations of the SEC is very clear. Once that 15% has been filled up, let’s say: This is covered by Sec. 38 of the SRC. Example: 100 of the existing stockholders offered to sell their shares under the terms and conditions which the person intending to acquire 15% of the shares will be able to accommodate. Then if it is fully accommodated, then that’s the end of the tender offer. It’s a first-come-first-serve basis. Or, of course, 30%, that is, if he wants to acquire 30% of such an equity security over a period of 12 months. Same rule applies. He is there supposedly to protect the interest of the general investing public. He must have an independent judgment from the management itself. Just like the Tender Offer rule, any corporation with a class of equity securities listed for trading in an exchange, or With assets in excess again of 50M and having 200 or more shareholders, at least 200 of them holding at least 100 shares Must appoint or elect at least 2 independent directors or such independent directors shall constitute at least 20% of the membership in the Board of Directors whichever is lesser. Q. WHO MAY QUALIFY INDEPENDENT DIRECTOR? PROXY SOLICITATION Under the Corporation Code, Proxies is a matter of right to stockholders and for the validity of the proxy, it is enough that it be signed by the stockholder. It need not be notarized. If you solicit proxies under the Corporation Code and it is not listed in the stock exchange, nobody cares. But under the Proxy Solicitation Rules of the Securities Regulation Code: A broker or dealer who holds or acquire proxies for at least 10% or as such percentage as the TO BE AN An independent director is a person other than an officer, or employee of the corporation, its parent or subsidiaries or any other individual having any relationship with the corporation which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director apart from his fees and shareholdings which should not exceed 2% of the outstanding stocks If it exceeds 2%, you are not qualified to be an independent director. Your stockholdings should not be less than 2% AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 79 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Is INDEPENDENT of management and free from any business or other relationship which could or could reasonably perceive to materially interfere with its exercise of independent judgment in carrying out his responsibilities as a director in the corporation. In the case of Equitable, the independent director they elected is also a director of a subsidiary of Equitable Bank and therefore, based on this rules of the SEC, he cannot qualify to be an independent director. Because it says, “a person other than officer or employee of the corporation or its parents or subsidiaries.” He is not qualified to be an independent director because he has a relationship with the corporation itself through the subsidiary of the corporation. It will interfere with the management judgment of the particular director concerned and he will not qualify to be an independent director. INSIDER TRADING Under Sec. 27, it is unlawful for an insider to buy or sell the security of an issuer while in possession of a material non-public information If that is the case and he is in possession of a material non-public information, he cannot buy or sell the security involved. Q. MANILA GAS CORPORATION IS ENGAGED IN THE SEARCH AND DRILLING OF NATURAL GAS. IT WAS ABLE TO DRILL A NATURAL GAS OF COMMERCIAL QUANTITY. THEY DID NOT DISCLOSE THE SAME TO THE GENERAL PUBLIC. WHAT THEY DID WAS, THE DIRECTORS AND OFFICERS BOUGHT THE SHARES IN THE STOCK EXCHANGE OF MANILA GAS ITSELF. THEY DID NEVER DISCLOSE TO THE PUBLIC. ON THE FOLLOWING DAY, KNOWING THAT IT IS ILLEGAL FOR THEM TO TRADE IN THE PARTICULAR SECURITY, THEY WENT TO A PRINTER IN ORDER TO DISSEMINATE THE INFORMATION THAT IN FACT THEY WERE ABLE TO DRILL A NATURAL GAS OF COMMERCIAL QUANTITY. THE PRINTER, LOOKING AT THE DATA, INSTEAD OF PRINTING IT IMMEDIATELY, ALSO BOUGHT THE SHARES OF MANILA GAS BEFORE HE PRINTED THE MATERIAL. WHAT IS THE OFFENSE COMMITTED BY THE OFFICER OF THE CORPORATION AND/OR OF THE PRINTER IF ANY? Insider Trading. With respect thereto of the securities, that is, is not generally available to the public unless: Q. IS THE PRINTER ALSO LIABLE? WHY? WHO IS AN INSIDER? (1) The insider proves that the information was not gained from such relationship; or Yes. Section 3.8 (2) If the other party selling to or buying from the insider is identified and the insider proves that he disclosed the information to the other party; or (3) He had reason to believe that the other party is also in possession of the information. While in possession of a material non-public information, the insider cannot buy or sell the security involved. It is illegal under Sec. 27 of the SRC. Q. WHAT IS “MATERIAL NON-PUBLIC INFORMATION” SO AS TO BAR THE INSIDER FROM BUYING OR SELLING THE PARTICULAR SECURITY? Material non-public information, if it has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of reasonable time for the market to absorb the information or would be considered by a reasonable person important under the circumstance in determining his course of action, that is, whether or not to buy or sell the security or hold on to the particular security. The issuer, director or officer or any person performing similar functions or a person controlling the issuer. A person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public. The printer in this case was able to gain access to material information about the issuer that is not generally available to the public. He’s a person whose relationship or former relationship with respect to the issuer gave him access to the information. He is also an insider. Even government employees, directors or officers of an exchange or clearing agencies or any person who learns such information by communication from any of these persons would be considered insiders. And while they are in possession of this material non-public information, they cannot buy or sell the particular security involved. Even investment contracts are included in the enumeration of securities. Normally, this is also what is being used by the SEC and the DOJ in pinning down the operators of what is generally called, “The Pyramiding Scheme Operators”. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 80 AUSL/CORPORATION LAW REVIEWER/AJP-SFO For purposes of the coverage of the meaning of securities, investment contract is: security almost at the same time, almost at the same price and almost at the same issue. A contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or the 3rd party. Example: In People v. Petralba, the Supreme Court held: The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. 9:32, he called Broker 2 to sell 1M shares at P1.20 per share. You cannot sell these securities to the general public without a registration statement having been filed an approved by the SEC. The “general public” meaning, more than 19 persons. If you sell securities to more than 19 persons and it is not covered by exempt securities or exempt transactions under Sec. 9 and 10, you cannot do so without a registration statement having been filed and approved by the SEC. If you do that, you are violating the SRC and you will find yourself facing the penal sanctions provided for under Sec. 73 or even perhaps as what the DOJ did, they may file a criminal action for Syndicated Estafa which is nonbailable. OTHER FORMS OF FRAUDULENT MARKET MANIPULATIONS AND (1) Wash Sale Any transaction in a security which involves no change in the beneficial ownership thereof is Wash Sale. Example: Mr. X is the owner of 10M shares of the particular shares of stocks. He has brokers, Broker 1 and Broker 2. He calls his Broker 1 and say, “Buy 1M shares of A company at P1.20 per share.” He says to Broker 2, “Sell 1M shares of the same corporate issue for P1.20”. They matched and there was a trade. Mr. X sold 1M shares in his name and he bought 1M shares also in his account with Broker 2. There was no change in the beneficial ownership of the particular issue at hand. This is Wash Sale. (2) Match orders The buying or selling of a particular security knowing that another interested party will also offer to buy and/or sell the same type of Mr. X called Broker 1 to Buy 1M shares of A corporation at P1.20 per share at 9:30am; Trading starts at 9:30 The same, he matched his own order. Mr. X placed an order for the buy and sale of the particular security in the same issue, almost the same volume, the same price. That is Match Order. Q. IS THIS ACTUATION OF MR. X ILLEGAL? Not just yet. It must have the effect of showing a false of active trading in the particular issue. One transaction will not make a false appearance of active trading in the particular security. Mr. X has only 1 transaction so it is not yet illegal. It will only become illegal only if it creates false or misleading appearance of active trading in the particular issue. Example: Mr. X had actually 7 Broker firms, broker 3, 4, 5 and 6. Let us assume that account #1 is under his name, account #3 is under his name, account #5 under his name and vice versa. All of them were under his name. At 9:40, he calls broker 3 to buy 1M shares at P1.30 per share. He then call broker 4 to sell 1M shares at P1.30 per share at 10:05 all the way down until 11:59 before lunch. He calls broker 5 and says, “Buy 1M shares at P2.00 per share” and during that particular day, Mr. X has placed 22 buy and sell orders for the same security, using the same scheme Wash Sale and Match Order. Now, you have a false or misleading appearance of active trading in the particular issue. It now becomes illegal. He may have also committed what we call “Painting the Tape” and “Marking the Close” (3) Painting the Tape Refers to the buying and selling of securities to fix the price of the particular security either of increasing or of decreasing the value of the shares or the security during regular trading hours. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 81 AUSL/CORPORATION LAW REVIEWER/AJP-SFO Pushing up the price of the security, that is Painting the Tape. (4) Marking the Close If you place a buy or sell order near or very near the closing hours of the trading day. So much so that no person can match your order anymore. Example: You placed an order at 11:59, 1 second left before the market closes, of P2.00 per share. You have Marked the Close. Meaning, the following trading day, all others selling their shares, will of course, sell their shares at P2.00. (4) Insider Trading While in possession of material information non-public, you cannot trade or deal in the particular issue of the said shares of stocks. It is also illegal. (5) Short Sale Selling of security which the vendor or the seller does not own, possess or hold. Under the Code, Short Sale is illegal if it is not in accordance with the rules and regulations of the SEC. Short sale, therefore, is illegal per se at this point in time if the SEC is not yet or has not yet come out with the rules and regulations governing Short Sale. (6) T3 or T4 Rule Sept. 9, the bombing happened. American Airlines is the airline involved. The value of the shares of American Airline on that very same day went down to $0.50. Sept. 10, the insider called his broker to buy 1M shares of American Airlines at $0.50. He now has shares. On the 4th day, a buyer will ask for the shares. He will say that the shares are with his broker. There you have it. The transaction has been completed. He complied with his part of the obligation. SETTLEMENT OFFERS At any time during an investigation or proceeding under this Code, the parties being investigated and/or charged, may propose in writing an offer of settlement with the SEC. Upon receipt of such offer or settlement, the Commission may consider the offer based on timing, the nature of the investigation or proceeding, and the public interest. The commission may only agree to a settlement based on its finding that the settlement is in the public interest. Any agreement to settle shall have no legal effect until publicly disclosed and such decision may be made without a determination of the guilt on the part of the person making it. Example: There was a short sale. The SEC has no rules. It is therefore, illegal. So the SEC conducts an investigation regarding the matter at hand. During the investigation, he makes an offer with the SEC, “I will pay P2M as fine for what I did.” Example: Considering the timing, the public interest involved, and the disclosure made to the public, the SEC may accept the offer that he pay P2M instead. If the SEC will accept the offer, that will be the end of the investigation without finding the guilt of the party involved. You transacted with the particular security, for instance: Of course, if it will have an effect on the general public, the SEC will decline. T3: Today you buy, 3 days thereafter, you must pay the acquisition cost of the share; Today you sold 100M shares, plus 3 days, you must deliver the stock certificate. LIMITATIONS OF ACTION Transaction date plus 3 days or Transaction date plus 4 days Example: Assume that there is an insider that knew that the twin towers in New York will be bombed by Osama Bin Laden, using the American Airlines Planes. American Airlines shares are being traded in most of the cities of the world. The value of American Airlines shares is $1.20 per share. The insider then sells 1M shares of American Airlines at $1.00 per share. But in reality, he has no shares. No action shall be maintained to enforce any liability created under any other provision of the Code unless: (1) Brought within 2 years after the discovery of the facts constituting the cause of action; and (2) Within 5 years after such cause of action accrued. AUSL/CORPORATION LAW REVIEWER/AJP-SFO P a g e | 82